Peter Mallouk (03:19):
And so I think when you hear somebody talk about their best investment, they usually talk about where they put a certain amount of money in that made the most money. But for me, it’s the investment that makes you the most money in your life. And that investment was a total loss, you see huge, a loss of a bunch of time and effort, but the lessons learned were an incredible education in terms of how fast technology moves. You might think of your competitors, the other music stores, but it’s really something that doesn’t exist yet. It’s Walmart thinking about Target and not thinking about Amazon, for example. And so I think it’s that lesson by far the best investment. It really still impacts my thinking month to month.

Trey Lockerbie (04:01):
I love it. All right. So before we get into wealth management, some of the topics around that, I was hoping we could focus a little bit on the economy today. At the time of this recording, the Fed has recently raised interest rates up about 25 basis points and you’ve seen the yield curve now invert. What is this telling us exactly? And should we change our approach as we potentially expect a recession in the economy to come?

Peter Mallouk (04:26):
The yield curve inverting is an interesting thing, because, first of all, it’s complicated. A lot of people don’t understand it. So maybe let’s just start with what an inverted yield curve is. Basically, it’s when short-term interest rates are higher than long-term interest rates. And most people measure that by looking at if you loan money to the federal government for two years, they’ll normally pay you less than if you loan the money for 10 years. And it makes sense if you go to a bank and you’ve got a one-year CD, they’re going to pay you less than if you buy a CD that doesn’t pay out for five years. If you’re tying up your money longer, you want to be paid more because interest rates could go up. In the meantime, you don’t want to be stuck in something.

Peter Mallouk (04:59):
So it’s really weird if you can loan money to the federal government, for two years and get paid more than for 10 years. What is that telling the market? It’s telling the market that investors think the economy’s going to be weak in the future. And that the government will have to keep rates low to re-stimulate the economy. It might be strong now, but it’ll be weak later. And so people look at that as a signal of where the market might go. And sure enough, most but not all of the time when the yield curve is inverted, the stock market goes down later and there is a recession.

Peter Mallouk (05:25):
Well, here’s the problem. Sometimes it doesn’t go down. And sometimes there isn’t a recession. When it does go down and there is a recession, it usually happens a year and a half or two years later, so we don’t know what’s going to happen anyway, because the economy’s always expanding and contracting. That’s why it’s called an economic cycle, it’s not called the economic straight-up machine, it’s called the cycle, it expands and contracts. And the world is dynamic. Stuff happens. Pandemics and Ukraine and technological innovations, things that have nothing to do with that, can flip the inverted yield curve the other way very quick.

Peter Mallouk (05:55):
The last time the yield curve inverted was in 2018/2019, and it was not a very good signal then. The market went on a tear unless you count the pandemic, which had nothing to do with the inverted yield curve. So I don’t like it as a signal. I understand why people pay attention to it, but other signals I think are a little bit more valuable.

Trey Lockerbie (06:14):
The markets have been seemingly slow to respond to some of the evolving events around say Ukraine and Russia, etc. Talk to us about how we as investors should look at the potential impact of the world events that are going on outside the US.

Peter Mallouk (06:29):
See, it’s really interesting, Ukraine, because when Russia invaded Ukraine the S&P 500 was down about 11%, small tech stocks were getting destroyed, Chinese stocks were getting destroyed, mean stocks were getting destroyed. There was carnage everywhere and S&P 500 was finally in correction territory for the first time since the pandemic. And all the S&P 500 was to go down maybe 2% more and now it’s way, way up. So it’s up a lot, maybe 10% from when Russia invaded Ukraine. So the stock market’s not really looking at this and seeing World War III. I think it thinks Apple’s going to keep selling phones and Nike’s going to keep selling shoes and my kid’s still going to want to go to Taco Bell or McDonald’s or Chipotle or whatever, and that stuff’s not changing. And the market’s probably right.

Peter Mallouk (07:11):
But I think that the issue with Ukraine is much more severe and much longer term. And I think we’re going to be talking about it a lot later. And I would look at a couple of different things that are happening. So, first of all, the US imposed a lot of sanctions on Russia, which sounds super great for being tough and it’s fantastic. But they did something unique this time. They tried to push them out of the international monetary system. They tried to actually make it where they can’t do business with people. Now, if you’re not super friendly with the United States, this is not a great thing. You’re looking at this and going, wait a second, the US dollar is the reserve currency, which basically means it’s the currency that everyone in the world agrees. If you trade your currency for that or your oil for that, you’ll have something everyone will take. They’ll take the dollar.

Peter Mallouk (07:56):
Well, if we’re going to start kicking people out of that system, that’s raised a few eyebrows. So now China is looking at the world very differently and it’s going to accelerate, trying to make their currency the reserve currency. Saudi Arabia is talking about taking payments in Chinese currency instead of US currency. So I think the US might have a self-inflicted wound from this as it is. We’re racking up a bunch of debt. And the more debt you have, you only get away with that if you’re the reserve currency. If the whole world goes, you know what? Who cares if their debt went from 15 trillion to 30 trillion? They’ve got a bunch of people that they can tax more, and we still believe in that dollar. Maybe we don’t love that they’re in a huge amount of debt. It doesn’t feel as strong as when they’re not in debt, but it’s still, probably better than everybody else.

Peter Mallouk (08:41):
But if you add all of that debt plus this desire for countries not to want to count on us as the reserve currency, because we just told them they can’t count on us, if we don’t agree with them with whatever they’re doing right or wrong, it’s going to drive people away from the dollar. And the question is, how long can the US contain it? But what changes a country from being the world leader, it’s not military, it’s not social if you’re the reserve currency. The reserve currency means the world sees economic strength that could be predicted from the military and economics of the taxpayer base and so on. We have made it easier for China and others to have a reason to accelerate moving away from the dollar. I think that’s one very serious implication here.

Peter Mallouk (09:23):
I think another implication that I think its too early to feel, but it’s going to be big, I think is de-globalization. So I think one of the things that we’ve seen is the world generally coming together. And if you think about what contains prices, one of the things that contain prices is technology. The TV you have today, the phone you have today, and the computer you have today are way better than the TV phone, and computer you had 10 years ago. And it actually costs less adjusted for inflation. That’s the power of technology in terms of creating deflation. If we look at the other factor it’s that we can always go get something done where it costs the least. So most things in America have a part made in China. Why? Because it costs less to make it in China. And when China’s economy gets stronger, a US company will go to India. And when that gets stronger, it’ll go to Africa. And so it starts to lift people across the world out of poverty as they get paid more than they were from their local company.

Peter Mallouk (10:16):
And it keeps the price of goods low because when you get something when you buy a product, it might be made in six different countries where the company can make that part the cheapest in each country, whether it’s an iPhone or a car. Well, what we’re seeing here is that instead of the world really doing commerce together, we have put all these sanctions on Russia. And so you start to look at we’re going backward in the sense of all of us working together. What we’re seeing now is a supply shock of fertilizer costs, more food costs. It’s adding to the supply chain issues we already have. And we’re seeing inflation built into that.

Peter Mallouk (10:48):
But part of this is going to be permanent, because people are looking at working with other countries and saying, well, wait for a second, if I need this, if Germany needs energy from Russia, that’s a problem for Germany. So what’s Germany saying now? They’re saying, we’re not going to do this with Russia. So now they’re not going to their lowest cost option, they’ve got to solve it some other way locally, which means it’s going to cost more for people in their backyard. We’re going to see this de-globalization have more of a permanent impact on inflation going forward. I think we’re just scratching the surface of what it means.

Peter Mallouk (11:17):
Think about it from a national security perspective. The fact that the United States relies on Taiwan for chips, at the beginning of the war in Ukraine and China flew some fighter jets on the border. If they invaded Taiwan, we’d have an interesting situation, but we would also have the United States very dependent on the outcome. What are we going to do? Because of de-globalization, we’re going to start to do these more in our backyard, which costs more. And I think we’re going to see that all over the world, every country’s asking itself, how dependent am I on everybody else because I can see how quickly things can change?

Trey Lockerbie (11:46):
And that’s not going to be any help to the inflation we are seeing today.

Peter Mallouk (11:50):
That’s right.

Trey Lockerbie (11:51):
And that Ukraine piece is really interesting because they are the breadbasket of the world. There’s a lot of weed coming out of those regions that are not going to be planted. And we’re going to see some disruption and things like that, which could just affect the overall food supply. Do you feel like the markets just aren’t actually factoring that into the equation yet as far as the commodities have still been rising pretty significantly over the last couple of months? And are we just not factoring that in yet?

Peter Mallouk (12:18):
Well, I think the market basically looks and says, what do I think is going to happen? And what the market basically is telling us is there’s going to be a resolution here. Now, I don’t know what the resolution’s going to be. And someone can accidentally fire a missile in the wrong direction and we have World War III. Putin really could be crazy, and anybody else could do something crazy. But what the market’s basically saying is they’re probably going to sit down. There are going to be three new independent countries that are friendly to Russia and Ukraine will be neutral and sign something that they won’t join NATO. And everyone will probably go about their business without the spilling over into Eastern Europe and then dragging the whole world into it in a bigger way. The market’s betting on that.

Peter Mallouk (12:53):
If there was one second that there was an indication that was going to get worse than that, the stock market would get much, much worse, very, very quickly. So I think it’s just looking at that short-run and it doesn’t see something going on for 10 years or if it does, it sees it as very contained. And it sees this as something that the likelihood of it spilling over is low. And I think that’s why we’re seeing the stock market reaction today. The repercussions of what happens with de-globalization everything else is less certain and probably way out in the distant future.

Trey Lockerbie (13:20):
So you mentioned it’s a matter of how long the US can keep the music playing with the US dollar, so to speak. And the recent events, as well as what we talked about the yield curve inverting shortly thereafter raising interest rates just 25 basis points. Does that give you the cost for concern that things are escalating may be quicker than you might have imagined maybe even a couple of years ago?

Peter Mallouk (13:42):
No. I think we have high inflation in the United States and it’s definitely more than what is being stated by the inflation index, which is it’s 7.9% or whatever it is. It’s too low. When used car prices are going up and food prices are going up, all these things are going up double digits, somehow we extrapolate the cost of housing is up a double-digit. Somehow we get to 7.9 beyond me. And everyone knows that. And the federal reserve has said, don’t worry about inflation. And then it’s going to go away really quick is now saying they’re very concerned about inflation. So I don’t think the yield curves inverting because the interest rates went up 25 basis points, I think it’s inverting because the federal reserve has made it very clear they’re going to raise rates a lot more quickly. So they’re looking and saying, look, in next month, they’re going to raise it probably 50 basis points. And the market thinks they’re probably going to raise it a few more percent before they’re done.

Peter Mallouk (14:25):
We’ve still got probably seven or eight hikes to go before this is done. I think the market’s pricing is all that end. So if I was going to build a house, if I’m a home builder and interest rates went up 0.25 now, I don’t really care. I’m still going to build. If I was going to build 20 houses, I’m still going to build 20 houses. But if I think by the time my houses are done a year from now, interest rates are going to be two, 3% higher, am I still going to build 20 houses? Maybe not. Maybe I’m not so confident. Well, that’s how the stock market’s looking at it. It is saying, what’s this going to look like when the rate hikes are done? And there’s no reason for the market to think the rate hikes aren’t going to happen.

Peter Mallouk (14:57):
And when you talk about indicators, one of the indicators of the stock market is what are real estate housing stocks doing? And the homebuilder stocks are getting crushed. So people looking at that space are saying, these builders are probably going, well, if rates are going to be higher, I’m not to build as many houses. And so then the people that they hire to do drywall and electricians and plumbing, they say, oh, I don’t need that many people. And then the next thing these companies might be laying people off and then you have a recession. That’s why the yield curve is inverting is it’s looking forward like that.

Peter Mallouk (15:24):
That doesn’t mean it’s the outcome we’re going to get. So the federal reserve is saying that they have a high degree of confidence and a soft landing. And a soft landing means we think inflation’s too high now and we don’t want to raise rates so quickly that we make homebuilders stop and everybody else stop hiring and buying cars and houses and all of that and we have a recession. We want to play it perfectly, not too hot, not too cold, Goldilocks soft landing. We want to play it perfectly. Raise rates enough to take the air out of this little bit of a bubble. It’s warming in the housing market and with planes and boats and cars and second properties and all that stuff. We want to take the air out of that and control inflation without ending the party.

Peter Mallouk (15:59):
And the stock market’s holding up because it believes probably they have a decent chance of pulling it off. And so that’s of all these different tensions happening at the same time. And, again, one thing happens out of the blue, terrorist event, pandemic, whatever and all this conversation doesn’t matter, which is why it becomes not actionable. A great investor really isn’t looking at those things necessarily, because stuff always happens. 9/11 tech bubble, 08/09 pandemic, Trump, Biden, whatever stuff, Ukraine. There’s always something happening. So the great investors basically saying, what do I need for the next five, seven years? I need to have that in investments that are accessible, no matter what happens in the world, pretty safe that I can go get the money and it’s not down a lot.

Peter Mallouk (16:41):
What do I need? seven, 10, 12 years from now? Well, I need stuff that stays ahead of inflation. Probably a Hershey’s Bar is going to cost more, probably a can of Diet Coke is going to cost more, probably a meal at McDonald’s going to cost more, and a ticket to Disney World. I need stuff that stays ahead of that or I lose my purchasing power. And so you have that in the growth-oriented stuff. And if you happen to be super wealthy, you can even do liquid stuff that goes beyond that. But I think the intelligent investor is doing that because all the dynamics you’re bringing up impact markets quarter to quarter, year to year.

Trey Lockerbie (17:09):
I love that you give these examples using real estate and home prices and homes in general because I think that’s just so easy to understand and grasp. But you did mention housing entering “a little bit of a bubble.” But over the last year, we’ve seen a 20% increase in homes nationwide here in the US. And now we’re seeing mortgages creeping up to 5% or so. This should mathematically negatively affect home prices, but will it affect people’s decision-making around buying homes in your opinion?

Peter Mallouk (17:38):
So I think that there was this mythology that millennials don’t want to live in homes. That was ridiculous. I never believed that for one second. They just weren’t grownups yet. When you get grown-up and you’re going to have kids, you go, hey, maybe it’s nice to have a little bit of a yard and stuff like that. And so there was a legitimate shortage of homes and especially look at all the people in the industry that left the space of the 08/09 crisis. Just really, I firsthand saw a lot of clients that were extremely intelligent. Did a great job that was developers that just got destroyed. So you see a lot more caution in developing. People weren’t as willing to do all these neighborhoods at the same time. It was more like, hey, things can change. I’ll take it easy. So you didn’t have enough supply.

Peter Mallouk (18:14):
So if you don’t have enough supply, the prices go up. You couple that with all kinds of stimulus, corporate bailouts, forgivable loans to private businesses, stimulus checks to everybody else, and you lower interest rates. So the Fed lowers rates, gives everybody money and you don’t enough homes, of course, home prices are rocketing. Now, the Fed’s going to take care of part of this. They’re taking money out of the system and they’re raising interest rates. So that will diffuse it a little bit, but we still to your point have a shortage. And until supply meets demand, they can’t solve all of the inflation problems. But they can take a lot out of it by raising rates a couple of points.

Trey Lockerbie (18:48):
I don’t know if I’d say they’re taking money out as much as just not putting as much in, but to that point, with the liquidity that’s been created over the last couple of years. So I’m currently recording this from Miami where I’m at the Bitcoin conference. And I’d like to touch on that a little bit. You’ve gone on record dismissing gold and Bitcoin, and you gave this great overview on The Tim Ferriss Show a while back discussing that. So we won’t rehash it here. But that interview was in 2019, and that was before a global pandemic and all of the things that have happened since. The government has now proceeded to print over something like $11 trillion. And Bitcoin has 10X in value since then as well. I’m sure the two are correlated. Has anything in the last couple of years made you reconsider at least the use case of Bitcoin?

Peter Mallouk (19:32):
So I’ll start with cryptocurrency. So I think if you look at the case for cryptocurrency is, hey, the blockchain… When you say, why does a cryptocurrency has value? People will tell you that there’s the blockchain. But the blockchain isn’t really have anything to do with it other than it’s the template that you have the cryptocurrency on. So lots of runs on the blockchain. It’s like saying you like Google because of the internet. The internet can work out great and have Excite and Lycos not work out. Or saying, I love the iPhone because it uses this mobile technology. Well, Palm didn’t work out and neither did BlackBerry. So I accept blockchain from day one is going to revolutionize everything from the way we handled D titles to concert tickets to transactions and contracts and everything else. The blockchain is an incredible technology. We’re just scratching the service of what’s possible there.

Peter Mallouk (20:20):
Now, cryptocurrencies like Bitcoin sit on the blockchain. So the argument for, well, what makes Bitcoin worth something is there’s only 21 million of it. Well, anyone today could create any cryptocurrency and only have 21 million of it. That’s not what makes Bitcoin special at all. So it drives me nuts when people make that argument. I could come out with my own cryptocurrency by an hour from now. There are 9,000 cryptocurrencies I believe today. I could say there’s only going to be 5,000 of this. It won’t magically be worth something. Money quite simply is worth something if someone will accept it as money. That’s it. So when you look at a $1 bill or $100 bill, you will take it from me because you believe it will hold its value later. That’s the only reason. But the difference between that dollar and the 9,000 cryptocurrencies is that 9,000 cryptocurrencies are not backed by anything. So you just have to believe the cryptocurrency is going to be worth something to somebody else.

Peter Mallouk (21:11):
If you look at the dollar, it says it’s backed by the full faith and credit of the US government. So every currency of a government’s backed by that government. Now, we can make a decision, this specific government we don’t trust to pay us. People in Greece did that, people in Turkey did that, and people in Zimbabwe did that. It happens all the time. This is an argument for cryptocurrency is that eventually the government will screw things up and we won’t trust that currency. But if you give me a million dollars, do I think that probably someone will say, hey, I will sell you cars and houses for that a year or two from now? Yes, because when it says backed by the full faith in the government of the US, it means that they can tax people or print more to take care of it. Now, there might be inflation that diminishes the value of the dollar, but there’s a reason it holds value.

Peter Mallouk (21:52):
There’s only one reason that any cryptocurrency, Bitcoin or any other one, can hold value, is going to be if people believe it’s a sustainable currency. That’s it. That’s the reason. It’s not blockchain. It’s not that there are only 21 million. And that’s the reason that another cryptocurrency that uses the same technology and has similar limitations in terms of the amount that’s out there as Bitcoin, most of them are worth zero. The reason Bitcoin is worth where it is because a growing group of people is beginning to believe that it will be the cryptocurrency that will prevail.

Peter Mallouk (22:23):
My position on cryptocurrency has always been the same. Blockchain is real technology that is changing the world. There are going to be digital currencies, there are going to be cryptocurrencies that people use. I don’t know that it will be Bitcoin. Is Bitcoin the Palm or BlackBerry before the iPhone? Is it Excite and Lycos before Google? Or is it really the case where the first mover is going to be the one that becomes the global currency that everyone accepts? I don’t know the answer to that. So if I don’t know the answer to that, would I rather have a million dollars or a million in Bitcoin? I’d rather have the million dollars if you told me I’m going to be in a machine in a box for five years and come out and I’ve got to use one as currency.

Peter Mallouk (23:00):
I think the million dollars we all would agree would probably still be a currency. The Bitcoin might be worth five times more or five times less. So Bitcoin is still speculative. Once it actually becomes a currency, it can’t keep rocketing because for a currency to work, it has to be relatively stable. If it’s going to go up 20% in value or down 20% in value, you’re probably not going to sell me your car or your house. Like if I was using dollar bills and they were changing in value 20% week to week, that’s not a currency.

Peter Mallouk (23:26):
So what we have now is a bet that Bitcoin will become the currency. And it might be the currency. That might be what happens. People that are doing it just need to know it’s just speculating. They might be right, they might not be right. Maybe it’s cryptocurrency number three, four, or five. I still stand by the idea that 99% of cryptocurrencies are going to be worth zero. Not 1% of what they are today, but zero. There will be a few cryptocurrencies that emerge that if you’re fleeing Russia or Canada has frozen your assets, which, by the way, are incredible cases for cryptocurrencies. If you’re a Russian citizen and have nothing to do with this, all of this sudden you can’t use your money. If you’re in Canada and whatever protest is happening there, leave the politics out of it. And the government can freeze your money. This gets people interested in cryptocurrency. So I’m a big believer there will be digital currencies, and there will be cryptocurrency. Which one? I’m not certain which one it’ll be.

Trey Lockerbie (24:18):
That’s fair. I imagine though that as the price has been rising, it’s putting pressure on creative planning in particular to maybe incorporate something. I imagine you’re getting a lot of requests around this. Is that in consideration at all?

Peter Mallouk (24:33):
Well, I think it’s interesting. It’s like people, if you really like Apple stock and you go, I don’t have Apple in my portfolio. Well, our largest position is in the S&P 500, and Apple is the biggest position in the S&P 500. Most of our clients have more Apple than they realize. As Bitcoin is going mainstream, it’s all over our client’s portfolio. They own Tesla stock, they own Square stock. They’ve been in all of these things. So this idea that they don’t have exposure, I reject that idea. They have exposure to it and they have exposure to other cryptocurrencies. They’re probably going to go to zero as they work their way out of the balance sheets of these companies.

Peter Mallouk (25:04):
And so if you look at the waiting of the types of positions we use at Creative, by far, the biggest sector Creative Planning clients are invested in is the technology and in the US. And that’s where you see the most exposure to cryptocurrencies is through these companies. So I think most of our clients might even if they really knew what they owned, might feel like they have more than they bargain for in their portfolio. And do they directly own it? No, but at the end of the day, there’s not really a difference. If you own Berkshire Hathaway, you own the company Berkshire Hathaway owns. And if you own Tesla, Square, whoever happens to have some of these cryptocurrencies on their balance sheet, you own those as well.

Trey Lockerbie (25:40):
I’m in agreeance right now that Bitcoin is more of a store of value, hopefully. And you’ve mentioned it becoming a currency, which I found interesting it can’t be as volatile. And I totally agree with that. And there’s this interesting dilemma with the use case of Bitcoin for a lot of the population who are living in poverty, say the 40 million of folks who are in the US specifically. And how that factors into our current situation is interesting because those folks don’t typically store any wealth. They’re not using it as a store of value and they can’t use a currency that’s fluctuating as much as it is. However, if it is a store value, it would help them probably the most, because right now in our country, we have a wealth gap that is 0.1% of the people hold as much as the bottom 90%. So we have these ideas around UBI, higher taxes, things that close the wealth gap, but UBI could lead to higher inflation than we already have.

Trey Lockerbie (26:28):
So I’m just asking with all these things in consideration, Peter Mallouk, if you were the wealth manager of the US, what would you do to fix these pieces of our economy?

Peter Mallouk (26:40):
What you’re talking about is unbanked. There are people that just cannot open a bank account. And that’s just a terrible thing for society and not just those people, but for all of society. And I think it’s a great case for digital currency and bypassing this whole process. And whether that’s Bitcoin or something else or something sanctioned by the government, that’s beyond probably the scope of this conversation. But we have to get the unbanked banked. You can’t pull people out of poverty if people can bank. That’s maybe not a case for why Bitcoin’s going to succeed, but it’s a great feeling for people to have.

Peter Mallouk (27:08):
You were talking about I said that Bitcoin’s not a currency. Something’s a currency when you can go use it in most places. When you walk around town, you don’t bump into too many people who say, we won’t accept your money, your dollars, your checks that convert to dollars, your credit card that’s in dollars. But if I go to 100 places, somewhere between 99 and 100 will not accept my Dogecoin or my Bitcoin. It’s great when Domino’s runs an ad that they’ll sell a pizza for Bitcoin or someone posted for a house. It’s really a publicity stock. You have an athlete as a client who said he was taking a salary in Bitcoin. He wasn’t taking it in Bitcoin. He’s taking it in dollars and he is putting some of it in Bitcoin. The NFL is not paying him in Bitcoin. So when it’s a currency, you’ll know it because people will be using it regularly everywhere. Until then, there are people betting it will be the digital currency of the future.

Peter Mallouk (27:54):
In terms of the wealth gap, I think we make this way harder than it needs to be in the United States. We’ve politicized it so much. It’s very frustrating to watch. And I think that it really can be simplified just through the tax code. So if you look at the billionaire class, the cent millionaire class, you get there by owning things. You own a bunch of real estates or you own businesses or like Warren Buffett, you’re really good at owning a bunch of stocks. And the United States, we used to tax those things at 28% or more. And the Bush administration lowered that tax to 20%, which was just remarkably low. No one would ever thought it would stay there. And here we are. It’s still at 20%.

Peter Mallouk (28:32):
If you’re a lot of people like my dad who was a doctor for many years, they do really well in the United States. And they make six figures. And many of those people who make several $100,000 a year, they’re paying 35, 37 of the federal government. You start to pay your state and you’re losing 40 to 50%, some states more of your income to the government. And then you have obviously the poor who don’t pay or even just say the working class, we don’t even have to go to the level of poor. They might be paying between five and 10% but on a very small base. But the difference, the real issue with the wealth gap is really simple. It’s the difference between the capital gains rate and the income tax rate. If you just tighten those up and you get rid of the step-up and basis on death.

Peter Mallouk (29:14):
So right now, if I get hit by a bus, all the stuff that I pass on to my kids, they pay no capital gains taxes on it. So if you have an estate tax in the United States, if you have over a certain amount of money, the government takes 40% of your money, and we let people out of the capital gains tax. And the capital gains tax is low. If we simply had, and I’m not making any political statement, I’m just saying, if you’re trying to solve this problem, you would have the capital gains tax and the income tax closer to each other. You’d get rid of the step-up and basis on death and the estate tax will capture half of Jeff Bezos’s money.

Peter Mallouk (29:45):
There’s also this mythology that really wealthy people don’t pay estate tax. This is not true. It’s absolutely not true. Now, they can give it to charity and not pay estate taxes that way. That’s what Bill Gates is doing, it’s what Warren Buffett is doing, it’s what Mark Zuckerberg has done. They’re taking their money, they’re putting in a foundation. You can go, oh, they’re getting out of state taxes, but I think we’re doing okay here. If they’re going to give their 50 billion, $100 billion to charities, and it’s going to go to food banks and world hunger and water systems and school systems, you could argue they’re doing a better job of deploying that to the government or they’re not. That’s an author of political debate. But it’s not. Like say, they got out of taxes and passed it on to their daughter, they got out of taxes and passed it on to society. You could also get rid of the charitable break if you feel [inaudible 00:30:28] is the government. And I don’t think that I think that charities do a great job, for the most part, the right charities of deploying capital.

Peter Mallouk (30:33):
But the state tax is going to capture Elon Musk eventually. And if you get rid of his ability to step up his taxes and he pays a capital gain rate that’s a little, you will close the wealth gap. It will be closed very, very quickly. And you can go, well, he might live his whole life and die with all his Tesla stock. Well, a couple of things, one, it’s a minor miracle for a stock to stay very, very strong for 40, 50 years, a minor miracle. If you look at the top five stocks, the S&P 500 30 years ago, you wouldn’t even recognize some of them today. It just changes all the time.

Peter Mallouk (31:01):
And I think number two, so what? So what if he has a whole bunch of Tesla stock until he dies? Think about how many fewer people are going to die on the roads because of the technology he invented, think about what he’s going to be doing for the climate, and think about what he’s doing moving people away from traditional energy. So if you’re doing something that’s contributing to society like that, he’s not spending the money sitting in his Tesla stock. If he’s spending it, he’s paying taxes and on his death, then the government will take half of it or it will all go to charity. So I’m not too concerned about that in-between years, but I think the political discussion purposely over-complicates it.

Peter Mallouk (31:35):
I think the right gets caught up in a lot of things that divert some attention from how easy it is. I think the left gets caught up in some ideas. That just sounds so over the top. Even if you don’t sell something, we’re going to just guess what it’s worth and we’re going to tax it. These two, both sides are just making it too messy. And it does not take a brain surgeon to say, if you think this is a problem, this is how you could solve 90% of the problem.

Trey Lockerbie (32:03):
So if Elon or Bezos or any of these other billionaires we just mentioned called you up and said, “Hey, Peter, I want you to manage my money,” we all know that they get somewhat of a different playbook. They have access to other assets or other strategies that we just don’t have on Main Street. So maybe walk us through how the wealthy invest. And do you see a shift in the level of access happening from here?

Peter Mallouk (32:27):
There are a couple of different categories. So my son in college is starting out. He works three jobs. He’s a big saver. He’s putting every single dollar in the S&P 500 until he gets to $50,000. So that’s what I tell everybody, you’re just starting out, just do that. If you want to become a millionaire, the first thing you have to do is open an account. A lot of people just all do it later. Just open an account. Number two is automatic savings. If you’ve got a job, 401(k), add an IRA, try to make it automatic. Even if it’s small, force yourself to get going on it. If you can do that, the younger you are the bigger deal that is. You get to 50,000, a million bucks, or even up to 5 million, you can start to diversify, you add international, you add emerging markets, you add real estate, and other things. Then we get to this group of people called qualified purchasers who have 5 million or more. They do have access to other things.

Peter Mallouk (33:10):
And really I’d even say a step below when you get to a million, the government says you’re an accredited investor. And so you’re allowed to buy certain private investments. It’s usually too soon to really want to add those to the portfolio because you can’t get diversified enough. But some people do. They add one or two private investments that qualify for people that are accredited, investors. Then you get to 5 million, you’re a qualified purchaser, and the whole world’s open. The government basically says, look, no laws for the most part because you’re smart. If you want to invest in a private company, private equity, private lending, private, go do whatever you want to do. We’re just going to assume you’re sophisticated or you’ve got access to sophisticated advice, so we’re not going to regulate you as much.

Peter Mallouk (33:45):
So the world does open up to the people with 5 million or more. They can invest in private equity, which is just funds that invest in private businesses. You think about the typical person getting excited about an IPO, a stock going public, but really usually that’s owned by private equity. And that’s how private equity is getting out because they think the returns aren’t going to be as good anymore. So that’s when the IPO happens. So yeah, people who have 5 million enough, they’ve got a different deal.

Peter Mallouk (34:07):
Now, when you get up to these billionaires, the difference is they run their own private equity funds essentially. They might create their own family office, they might hire five or 10 people that used to work in venture capital or private equity. And they just say, look, we’re not even going to invest in these funds, we’re going to buy private businesses ourselves. We’ve got enough money. We’ll own 30, 40, 50 private businesses ourselves. And we’ll skip paying the 2% and 20% of the profits and all that. That’s a whole other level. But yeah, the bigger you get, the more access you have to things partially because of regulation and the law and partially because of the ability to acquire talent and diversify by investing privately.

Trey Lockerbie (34:42):
What do you think about the idea of say, a license to invest in? You mentioned your son working three jobs, just trying to build wealth. Sometimes having access to get the wealth is so hard when you’re just starting out, and maybe oversimplifying here, but you could have employees not even able to invest in the company that they’re working for that could build their wealth for them even though they’re the ones building it for the company. We have driver’s licenses, we have other things that say, hey, you’re smart, you know how to do this thing, what about a license for investing?

Peter Mallouk (35:12):
I don’t want to think about a government program telling people that they have to pass something before they can buy a stock or something like that. But I think financial education. It amazes me that there is no financial education requirement in every high school in America. So I think to graduate with a high school degree, it’d be nice to have even a half-hour credit of financial education, how to balance a checkbook, how to use a credit card, and what a 401(k) is. Very, very basic. I just was today teaching at university. And I was teaching the very most basic thing to juniors that were business majors at a major university. And there are 150 of them and the questions I’m getting really a 13-year-old should know. We need to have that financial education.

Peter Mallouk (35:54):
The number one thing that people over 50 worry about out is money. The number two thing married couples fight about is money. And the number one thing is probably obvious. It has nothing to do with money. It’s way more interesting. But I think that money’s a very big deal. It’d also be nice if they then took that other half-hour of credit and just taught people how to cope with the world, how to have relationships, how to manage relationships, and all those things. But this half-hour credit or one hour credit I think would really transform the country. Most people are not going to college, two thirds of people are not going to college. And even in college, they don’t have financial education unless you’re in a very specific class and a very specific major.

Peter Mallouk (36:30):
So we’re pretty much guaranteeing that most people are going into society, not knowing how to handle any of these things. And so then they have to find their way to a podcast like yours, which is fantastic. But how much time has elapsed before they on their own navigated their way to the right place? I think that I’ll pass on the regulation and the government getting involved in this, but I would be a big fan of more education.

Trey Lockerbie (36:52):
All right. So say we’re now starting out as investors and we’ve got a little bit of money we want to put it to work. You’ve written this book called The 5 Mistakes Every Investor Makes and How to Avoid Them. Could you just cover the five things and you wrote this book, it was released in 2014. I’m curious if it’s the same five things.

Peter Mallouk (37:09):
It doesn’t matter how much money people have, where they live, how long they’ve been investing, it’s always the same thing. I’ll cover a few of them, the big ones. One big one is going in and out of the market. And some people are dramatic about it like I’m going to go to cash because of Ukraine, I’m going to go to cash because of the pandemic or I’m going to go to cash because I don’t like Trump, or I don’t like Biden or whatever. And that’s deadly, just deadly because the market can go up. If you’re in it, great, you’re happy. It can go sideways. It’s still better than cash. You’re collecting dividends. And it can go down. Your worst-case scenario it goes down. What happens if it goes down? Well, it just happened 100 times before. We know how the story ends. It comes back. That’s your worst thing is you suffer through the pandemic or tech bubble, 08/09 or 9/11 or whatever.

Peter Mallouk (37:51):
If you go to cash because you don’t like who was elected or you don’t like the war that’s happened or whatever you think is going to impact your money, well, again, the market can go up and you’re in trouble. It may never go back to where it was when you exited. There are people that exited it down to 10,000. Is the government going to go back to 10,000? Probably not. Could it? Of course, it could, but probably not. So it was up, the problem for you is that loss is permanent. Okay. If you’re in the market and it goes down, it’s temporary. If you’re out of the market, it goes up, it can be permanent. And I think that’s the real problem with market timing. All you have to do is mess it up once in your life and the game is over.

Peter Mallouk (38:24):
So you’ve got this lifetime for people to go, this time is different, and get out. And I’ve seen it with the pandemic, I saw it with Trump, I saw it with Obama elected, I saw it with the tech bubble, 08/09, 9/11. It just takes one mess up. The other I think is this active trading and the friction that comes with active trading. And things can turn very, very quickly. Something can look like it’s doing really great for three years and lose everything in three months. I think that’s really surprising to do investors that if it can go up 30% in a week, it can go down 30% in a week. You might not have seen it yet, but that’s how it works. And so I think people get surprised sometimes at how quickly things can turn on them and you really get cut up in that inactive security selection.

Peter Mallouk (39:07):
And I think the biggest one, I’ll go to the end, which was the sixth bonus mistake, but it’s probably the biggest saddest mistake I see is that people don’t enjoy their money. And I think that people that are great savers and great investors, get some joy out of saving and investing and they forget the purpose of the money in the first place. At one point they wanted money to do charitable things or to help their kids or to go on vacations or to have a nice car, and then instead it just becomes piling up money just to have money. To me, that’s the most tragic mistake. And I’m con talking to clients about, hey, enjoy this. It doesn’t matter if your kids get 2 million instead of three or 12 instead of 14 or 500,000 instead of 700,000, no difference. But a huge difference if you spend a little bit more incrementally every year if you can. If you’ve established a good path, don’t kill yourself to save an extra dollar, enjoy yourself now. There might not be a tomorrow.

Peter Mallouk (39:58):
And it’s not just you, everyone around you care about you losing one person, you see this a lot. Someone retires and maybe they’re perfectly healthy, but the spouse has an issue and then they can’t travel anymore. You’ve got to have fun along the way. To me, that’s the biggest tragedy that comes with it. And it happens to the great investors because they’re the ones that create the big pile, they have a hard time enjoying it.

Trey Lockerbie (40:18):
Yeah. And I’ve heard you talk about how sometimes creating that big pile, comes with habits that you just can’t break. In the end, you’re being frugal or whatever have you and they don’t enjoy it. And that’s why I was so interested in talking with you specifically because you have seen this story over and over. You have such a big pool of experience to draw on. And I’d like to talk a little bit more about that balance that comes with investing and life. What are some actual tactical ways that we can balance achieving our financial goals, but also balance it with actually living life along the way?

Peter Mallouk (40:52):
I do think it helps to have something written down. Like a financial plan sounds like a big thing, but it can really just be here are the things that I own and the things that I owe, my assets and liabilities, here’s how much I’m setting aside to accomplish what I want. So if you’re 30 and you want to retire when you’re 55 with a certain amount of money, you get back into in five minutes how much you have to save every month to make it happen. So now, over time you get raises and think you might wind up ahead of schedule. Start to intentionally enjoy the difference. You can accelerate retirement, add more, and so on, but remember what your goal is and what you need to get there so that you give yourself permission to enjoy the difference, some of the difference, at least along the way.

Peter Mallouk (41:32):
And I think that people, it’s easier for them to enjoy if they have a little bit more certainty around their future. It certainly really frees you up to make a decision. If you go to a doctor and they go, oh, I think if we do this, then probably this will happen, but I’m not sure maybe that, the first thing you’re going to do is go get another opinion from another doctor. If instead, the doctor tells you, she says, “Hey, I’ve seen this 1,000 times and he here’s what it is, and this is the treatment and there’s a 98% chance you’re going to be okay.” You’re going to sign me up, where’s the treatment? Let’s get going. Certainty is really empowerment. So I think a financial plan gives you that certainty that empowers you to enjoy your money.

Peter Mallouk (42:05):
So I think people find it liberating, but they need to see that there’s a high probability they’re on track. It’s something they could do on their own or with a financial planner. But I think that really is what I’ve found. Just saying, hey, go enjoy yourself, that’s not going to work. People have to see that they’re not enjoying themselves at the expense of financial insecurity later.

Trey Lockerbie (42:23):
Most people spend their honeymoons on a beach and they’ll be reading fiction like James Patterson. I was on the beach with my wife reading Money: Master the Game. And Tony talks about you in the book Creative Planning. And actually, one of the biggest takeaways for me in that book was the calculation around retirement and living your dream life. And the dollar amounts can come out much smaller than you might even originally guess. So why is this such a profound realization for most people? And how do you recommend we go about calculating it for themselves and maybe we surprise ourselves?

Peter Mallouk (42:56):
Yeah. I think you have to go through the exercise of what does happiness looks like for you. What do you have to be able to be happy? Now, one thing that makes people happy is the freedom to do what they want when they want to do it. But if I want to eat out five days a week versus someone who’s perfectly content eating at home all the time, or if I love traveling 10 weeks a year and someone else they don’t like to travel at all, they just like to be at home and watch sports or whatever. Documenting what you want to do and backing into what that lifestyle costs, people can be surprised. Really what the big driver in retirement, the big expenses are housing and healthcare. So where you want to live and how you want to live, that roof you want over your head, or if you want two roofs over your head that changes the game a lot.

Peter Mallouk (43:35):
If you could control that cost, it really costs less than people think to be financially independent and to be retired. But part of it is just documenting, what do I need my life to look like? Okay. Now, what pile of money does I need to accomplish that? I do agree for most people, it results in a smaller pile of money than they thought. But I’ve done the exercise quite a bit of the time where people go, wow, if I really want to do, if I want to have the home in Cincinnati, but I also want to have a home in Naples, Florida, and I’m not going to go back and forth between them and ensure both of them and maintain both of them, wow, I need more than I thought, it can be eye-opening the other way too.

Trey Lockerbie (44:11):
In the book, if I’m remembering correctly, there might have been another product in there that I’m misremembering, but I remember him talking about fixed index annuities. But it was basically about generating income later in life. With Creative Planning, do you go about discovering or offering up annuities products like that too, that fit into a portfolio in any way?

Peter Mallouk (44:30):
So I don’t variable annuities, which takes inactive investing mutual funds and puts them in an insurance wrapper. I think it’s an expensive way to accomplish that. So we never recommend that scenario. And I don’t like equity index annuities, which are tied to the stock market. And it’s a lot of mathematical games played with how those returns work. I’m not against fixed annuities. So fixed annuity is basically you give an insurance company $100,000 and they tell you, we’ll give you a fixed amount of money every month for the rest of your life. We don’t recommend them because rates are low. And so I’m not really interested in a client having to take their money and give it to an insurance company in exchange for a very low monthly income for the rest of their life. It’s going to be very hard for them to fight inflation and get where they need to be in that format.

Peter Mallouk (45:14):
But if rates were higher, I might look at that differently. If you can get to that at a very low cost and you have a reasonable return, you can start to look at it as a bond-like portfolio with a little more certainty. But up to this state, my career interest rates have been low and it’s not been something that I recommend to clients. I prefer liquid stock-bond cost low, no commission. Let’s buy the stocks and bonds and construct the portfolio that way. And that’s worked incredibly well over the last 20 years.

Trey Lockerbie (45:42):
So starting out, maybe dollar-cost averaging into the S&P 500 is part of the game plan. As you get older in life, the allocation changes. You have to change up the diversification, maybe even incorporate things like bonds. That’s definitely the old philosophy. Maybe it’s still relevant. Obviously, bonds are questionable with those low rates as you just mentioned. As we’re getting older, and nearing retirement, how does the portfolio shift nowadays?

Peter Mallouk (46:08):
Well, I think a lot of people think that it’s really based on age and I’m not a believer in that at all. So I’ve got clients that are 80 that are still 90% in stocks. And I’ve got people that are 40, that are 60% or 70% in stocks. I think you start out and you say, where am I? And what do I want to accomplish? And what does the portfolio need to look like for me to get there? Now, for people that are 80, usually, they need a pretty low level of income, they’re usually done traveling, they’re usually not two homes and they want stability from their portfolio. They’re starting to think about leaving things to their kids and they don’t want a lot of surprises or drama. They might see more bonds in their portfolio. For someone younger, I always tell them to be as much in stocks as you can. If it goes up and down 50%, ignore it, by more, keep going.

Peter Mallouk (46:49):
But in general, I like to have enough liquid assets to meet short-term needs and everything else. We’re owning things, stocks, real estate, private equity, things that are going to stay up ahead of inflation. And that is correlated to age as a group, but each individual can be a little bit different.

Trey Lockerbie (47:05):
I know that you are getting this question a lot from your clients, but I’d love to hear your answer, why own bonds at all in this day and age?

Peter Mallouk (47:14):
Well, we’ll start with the idea the money has to go somewhere. So if it’s in cash, at least today, while we’re recording this podcast, you’re going to get zero. So that’s not very good. Now, if you’re in stocks, which I’m a huge believer in stocks, you have to have a long period of time. If I put money stocks today, the odds it’ll be positive a year from now is three out of four, which sounds great, unless it’s the one in four that doesn’t work out and you’re retired and you’re taking out money. Now, you’re selling stocks while they’re down. If you want to run out of money, you retire and then the pandemic happens and you’re taking money out every month while the stock market’s dropping 34%. That’s a recipe for the math not to work.

Peter Mallouk (47:49):
So we have to have something that is going to be there for us a month to month, if we’re withdrawing or near withdrawing, if something bad happens in the world that we weren’t expecting, whether it’s a 9/11 or a Ukraine or a pandemic, that’s where bonds come in. It’s basically covering those short-term needs. It’s probably going to be in pretty good shape in a crisis, at least about 29 out of 32 times. That’s the case. And when it’s bad, it’s not that bad. It’s down a few percent, it’s not down 20% or 50% like stocks. So they’re really there to make sure that you don’t have to interrupt your withdrawal plan in the event of those types of crises.

Peter Mallouk (48:25):
The other group of people it’s there for, people who just can’t handle the drama of the markets. They understand the math, they understand probability, and they understand staying out of inflation, but they don’t care. They’re going, look, I’ve got so much money it doesn’t matter, I don’t need the drama, build me a bond ladder. There’s nothing wrong with that either. If the point of money is to accomplish what you want, probably one of the things at the top of your list is to be happy. If you’re stressed out and worrying about stuff all the time, you’re not happy. And so that’s another reason. So I’ll own things that are pretty predictable and steady.

Trey Lockerbie (48:52):
All right. So as we’re nearing the end here, as I mentioned, I’m at the Bitcoin conference now. A lot of people here would tell you, hey, we’re nearing $30 trillion of debt, we can’t raise our interest rates, it’ll bankrupt, the country, the currency is defaulting, bonds are going to implode. Can Peter Mallouk provide some hope from here that the picture is not as dire as some folks here might be making it out to be?

Peter Mallouk (49:17):
Well, I think you have to look at the debt. I’m not a fan of having 30 trillion of debt. I think the government has proven, both Republicans and Democrats, that they have no sense whatsoever for running a balanced budget of any kind. Each party just prioritizes what they’re interested in. And neither of them, no matter what they say, has been really interested in paying down the debt. And really honestly, it’s very much like an individual. If I get a credit card for four years, whether I’m in Congress or the president or whatever, I can make everyone around me very happy. I can take everybody to the club and put them on a private plane and get everyone to live in a nice house. And just hand that credit card debt to the next Congress, the next president. Eventually, you’re going to have a problem. The cryptocurrency crowd has a real point there. And that has created the demise of many civilizations. This is not like this theory. At some point, it has to be controlled.

Peter Mallouk (50:06):
But if you look at the United States and you look at the debt, as much as it is, the difference between the United States and Zimbabwe and Turkey and Greece, countries people like to compare this debt to, the difference is we have assets behind it, whether it’s land or energy and gold, there are a lot of assets that the United States has. The United States is a naturally very rich country. And that’s a big differentiator that allows them to kick this can down the road. Now, that doesn’t mean the debt can be unlimited, but if you’ve got 30 trillion of debt and your house is worth 30 trillion, it’s okay. If you have one trillion of debt and your house is worth a billion, you’ve got a problem. And so I think that’s what’s giving the United States the ability to get away with this so far is we really do have a lot of assets. We have the leading technology, which creates a lot of service jobs, which creates a lot of income, which pays a lot of taxes. So there’s real stuff backing this debt up.

Peter Mallouk (50:58):
Now, I would say, even if there’s a problem, even if the United States winds up not being the superpower, that doesn’t mean investments go away. The United Kingdom was the leading country in the world for centuries. What happened is seeded that to the United States after World War II and their stock markets, I don’t know, up 20 times, 10 times since then. This idea is that if you lose the first place if China passes us that somehow the United States is collapsed. Not really how it normally works out. You still have Japan, you still have the United Kingdom, and you still have countries that were leaders. Their markets can still do well, even if they’re not in the first place.

Trey Lockerbie (51:31):
Very interesting. And I want to be mindful of your time. So we’ll wrap up from here. Before I let you go, I’d like to give you the opportunity to hand off to our audience where they can learn more about you, Creative Planning. And then if there are any other resources you want to share, whether it be calculating your retirement or a book to get interested in that your gift out to get people interested in investing, any other resources you want to share would be great.

Peter Mallouk (51:53):
Well, if anyone listening wants to check out Creative Planning, obviously creativeplanning.com. And you can let us know and someone will give you a call. We’d obviously welcome that. You can follow Creative Planning on LinkedIn and Facebook and Twitter. And then I’m pretty active on Twitter and other social media, like LinkedIn as well. So you could follow me at Peter Mallouk on all of those sites. The book I give all our clients is The 5 Mistakes because I think it really touches on the emotional side of things, the behavioral side of things, and the key things to get in place right away. I wrote another book, that is more planning-focused called The Path which I think is helpful as well.

Trey Lockerbie (52:29):
We will definitely have links to those in the show notes. So with that, Peter, thank you so much for the time. This is really enlightening and I really enjoyed the discussion. I’d love to do this sometime soon.

Peter Mallouk (52:38):
Yeah, it was great, Trey. Congrats on all the success you’ve had with the podcast.

Trey Lockerbie (52:42):
All right, everybody, that’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app. Maybe even leave us a review. We’d really appreciate it. You can also give feedback on Twitter. You can find me @TreyLockerbie. And if you’re looking to learn more about investing, definitely check out the resources we have for you at theinvestorspodcast.com. And with that, we will see you again next time.

Outro (53:03):
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