Welcome to the Retirement Wealth podcast. Our goal is to help those retired, or soon to be retired investors, make more informed financial decisions and live an enjoyable retirement. Our host, Mike Lester, is the founder and CEO of Talon Wealth Management. Mike is an investment advisor representative of Retirement Wealth Advisors Inc., an SEC registered investment advisor. Thanks for joining us today, and let’s get started.
In the last year or so, Mike, have you done any projects around the house that required you to run out to your favorite home improvement store and buy some lumber from time to time?
Mike Lester (00:41):
I’m kicking myself, because a project that I wanted to start and I didn’t do it, a dock at the lake. Clearly that’s nothing but lumber.
You waited too long-
Mike Lester (00:51):
… because demand for lumber skyrocketed during the pandemic.
Mike Lester (00:54):
Just shot my foot off.
Prices are at all time highs. My neighbors are constantly complaining about this because they’re big DIYers. Two by fours are more than three times their typical price. Even plywood has soared. The Wall Street Journal explains what’s really driven and is still driving this lumber boom.
Speaker 3 (01:11):
Lumber futures have more than tripled since the rally began in April, 2020. No one expected wood prices to soar, not even saw mills, lumber dealers, and others who profit from rising prices. When the pandemic set in, saw mills shut down like many other businesses. Before the lockdown, it was shaping up to be a strong home building season. But when the global economy grounds were halt in 2020, new housing construction in the US plummeted. Hunkered down homeowners remodeled in mass, and low mortgage rates drove demand for suburban housing. The building boom lifted the share price of home improvement giants, Lowe’s and Home Depot, ahead of the broader market. Wood was in short supply. Sawmills ramped up capacity, but couldn’t catch up, leading to a surge in prices.
I heard that home prices are on their fastest climb since the run-up to the housing crash 15 years ago. We’re seeing major shifts like this in the economy, and it scares me. But it also makes me go, hey, wait a second. No, think like an investor. Are there ways to capitalize on these sectors that are doing so well?
Mike Lester (02:14):
At this point I think we want to be really careful. If you’re like I was, I had to get the doc redone. That’s all lumber, and I wish you would have done it, but it would have become an issue. If you’re trying to build a home, it’s going to become an issue. I think we have to look at this as a bubble. It certainly is. If you go back and you look at the reason it happened, well, there was demand. People were staying home more. They were doing more home improvement projects, but COVID forced the lumber mills to shut down. There’s less lumber. You’ve got more people who want it because they’re staying home, doing home improvement projects, and they have an issue there. Then you take a look at everything that’s going on with now them trying to ramp back up and then the demand for lumber, as people are moving to new areas because of COVID.
Mike Lester (02:54):
A great example would be, people moving out of the Northeast because of how the Northeast handled COVID, or because of the shutdowns and people moving south to places like Florida. The housing rates and the cost of a home in Florida has skyrocketed. But also, if you want to build a home, it’s skyrocketed and mostly because of the cost of lumber. Back on April 19th, again, lumber is a commodity, so it trades in the futures market. And so, the futures price, basically the way they price it is price per 1,000 board feet. Okay, you have two by fours. I know that’s complicated. But imagine this, it was $32 a share. It jumped to $1,326 a share.
Oh, my gosh.
Mike Lester (03:35):
No wonder my neighbors are so upset.
Mike Lester (03:38):
It’s nuts. And so, that trickles down, okay. That’s futures. But bottom line, if you want to go buy lumber at the hardware store, it’s going to cost you a ton of money.
Mike Lester (03:48):
If you want to buy a house right now, it’s going to cost you a ton of money. So back to your original question, how do we benefit from this? Well, the first thing that I would say is, and again, I know not everybody’s in a situation where they can avoid buying a new home right now, but this has every indication that it’s a bubble. Bubble means temporary, right? We’ve got a situation where it’s crazy inflated and we look at the reasons why it’s inflated and the reasons why it’s inflated is temporary. The reason is COVID.
Mike Lester (04:15):
Eventually, the way economics work, and again, math guy, path of least resistance for me in college was finance and economics.
There you go.
Mike Lester (04:23):
Supply and demand. It is what it is. So, right now demand is really high and supply is really low. But the way economies work, the way markets work, is all the businesses out there that create lumber, they realize how much money they can make on it and there’s a rush to fill that demand for the lumber. And then eventually those prices are going to come down quite a bit.
Mike Lester (04:43):
So, what am I going to do personally with my dock? Well, what I’m going to do is I’m going to tie a warning, don’t go out on it, this summer. There’s boards. I don’t want anybody tripping, rusty nails, the kids. Nobody’s going out on my dock. But I’m not going to pay 10 times what the lumber’s worth, and I’m going to wait.
Mike Lester (05:05):
Now, not everybody can afford to do that, not from a financial standpoint, but from just a life standpoint.
Mike Lester (05:11):
From an investment standpoint, I would say this is a bubble. Take a look at things like home builders. I’m worried about the big home manufacturers out there. They’re doing really, really well. But when they sit down with a home buyer, and they have to sell you a home at a particular price, they have to know what they’re going to pay for their lumber in the future. And so, if we wind up in a situation where they’re trying to sell a young family a home, and they base the price of that home on lumber, and then those futures contracts don’t work out for them and then they can’t deliver that house at the price promised, it becomes a problem.
Mike Lester (05:49):
So, I’m worried about the home builders and how this trickles through and nobody’s really talking about that yet. I haven’t seen it, but be careful.
Mike Lester (05:56):
The ones that have done a good job with their futures on the lumber, probably do pretty well. But lumber prices I’d say a year from now, eventually it’ll all level out. Don’t get caught holding the bag. And that’s really what investing is all about. Just make sure you’re active, whether it’s real estate, whether it’s stocks, whether it’s bonds, just be active in the management of your portfolio and take a few steps back and understand what’s likely to happen moving forward, and learn to just appreciate a bubble. Be willing to just take two steps back and go, you know what? I’m just going to wait, because this scenario is going to be better later.
That active wealth management is something you’ve been preaching for years, Mike, and this is just another example of why that is so important. Link up at guardingyournestegg.com.
A lot of people were stockpiling cash during the pandemic.
Mike Lester (06:45):
Not toilet paper.
But Mike, I don’t know if they put money under the mattress or buried in the backyard because according to Moody’s analytics, there’s an estimated $5.4 trillion stashed right now, and Americans have the largest share of the excess savings globally.
Mike Lester (07:02):
First of all, a crime wave is about to take over America, because you just told everybody that people have 5.4 trillion stuff in their mattresses.
No, that’s globally. That’s globally.
Mike Lester (07:10):
Globally. Okay, sorry. Okay.
Americans. Though, 2.6 trillion. It’s still a big deal.
Mike Lester (07:14):
Still a big number. Keep that on the down-low, Kristen.
See, I would think it’s good news to be saving, but is it, or is it not?
Mike Lester (07:21):
Well, you got to look at why the saving happened. So, not everybody lost their job during the pandemic. A lot of people kept working, and I think the majority of Americans obviously kept working and they had an income, but there weren’t things to spend it on. There was fear in there.
So, toilet paper.
Mike Lester (07:36):
Yeah, yeah. There was toilet paper.
Spent it on that.
Mike Lester (07:38):
And paper towels.
You can only spend so much on that stuff.
Mike Lester (07:42):
You can only stockpile so much. But, first of all, there was fear about putting money in the market because of the volatility. But then there was also, look at what people saved on vacations. Look at what people saved on not eating out, going out, traveling. What they saved on fuel.
Mike Lester (07:55):
So, this stockpile of cash, again, 2.6 trillion here in the US, there’s reasons for it. You have to take a look at the reasons and wonder why, but it starts to make sense. And then when you do the math on why the money’s there, and you start to ask yourself, what’s likely to happen moving forward? Well ask yourself, what are people’s plans? So, I think that this is not money that people would have normally invest in the market, because that’s already happening in most people’s lives. If you’re working, you’re already getting the deduction from your paycheck to contribute to your 401k on a bi-weekly or a monthly basis. If you retired, your money in your investment accounts is your money and your investment accounts.
Mike Lester (08:34):
You’ve just been taking income that’s now building up over time. So, there’s going to be a balance moving forward. We’re already seeing some of these numbers. People’s, it’s not even a willingness Kristin, it’s their desire to get out and spend this money on travel, is higher it’s ever been. It’s going to be crazy for the next year or two. And the spinning is going to be crazy for the next year or two. The cruise line industry, by the way, I don’t know if you noticed, but we work with a lot of people that are retired. They’ve got some time on their hands.
Mike Lester (09:02):
And a lot of our clients like to cruise.
Mike Lester (09:05):
And they haven’t been able to do that for going on two years now.
Mike Lester (09:08):
And so, they’re able to book tickets on trips that they’re not even sure they can go on yet.
But they’re willing to …
Mike Lester (09:15):
They’re willing to put like, hey, I just want to go. I got to get out of here.
Mike Lester (09:18):
This has been crazy. And so, pent-up demand.
Mike Lester (09:21):
And again, that is going to manifest itself into certain things when it comes into markets and numbers from companies that benefit from travel. It’s manifesting itself into states like Florida that have just crazy tourism now. Off the charts. Just try to get a hotel room in Florida. It’s going to cost you, probably, three to four times what it would have been pre pandemic, even at high season. And you look at how all of this is moving around the world. We have to be just focused on how this is going to impact us moving forward.
Mike Lester (09:51):
So, we’ve talked about some things on the program today, Kristen. Certainly right now, we’re talking about the amount of money on the sidelines.
And does that affect-
Mike Lester (09:57):
We’re also talking about markets.
… Inflation, I was going to ask. Sorry to butt in there.
Mike Lester (10:00):
But, that’s one of the things I’ve heard people worry about lately is the stash cash that people are going to spend on trips and things like you’re talking about going out. It could hurt inflation, or no.
Mike Lester (10:12):
The inflation issue with cash is, if we have inflation and you have cash, again, 2.6 trillion, the best way to get hurt from inflation is to have your money sitting in cash earning nothing.
Mike Lester (10:23):
Because things are getting more expensive, but you’re not earning anything on your money. So, inflation is a hot button right now. People are worried about it. Certainly it could happen. But what I can tell you is, this economy has to go gangbusters. It can’t be a flash in the pan. It can’t be just everybody goes back to work, they’re making money, they’ve got their shots, and things are looking great for a short period of time. That has to happen, then it has to continue, and people have to continue spending money to drive the prices of products up.
Mike Lester (10:56):
For inflation. Everything has to get more expensive over time. And I’m not exactly sure that’s going to happen. We have to wait and see. I know people are worried about inflation. Having money in cash is going to be a problem. What are you going to do with it? Well, I’d say take a look at your investments. Look at what’s likely to benefit from the spending that’s going to happen, because it’s going to happen. That’s where this cash is going to go initially. Then take a look at, how is your portfolio likely to be affected by inflation, because we may or may not get it. How has your portfolio likely to be affected by changes in tax rates? We talked about long-term capital gains earlier. All of this is just a long-term approach to financial planning, and being in a situation where you understand what your portfolio is likely to do moving forward, given the concerns and changes we’re likely to have.
Speaking of planning, Mike, when you and the team at Talon create a financial plan for someone, you don’t base it off their current cost of living. Why is that? I would think my current costs are vital to my budget moving forward.
Mike Lester (12:04):
That’s a difficult thing for most people to answer. Let’s face it, Kristen, not all of us have a budget, a written budget.
Mike Lester (12:10):
We’ve been told have one. We’ve been told, write it all down, checks and balances. This is how much I spend every single month.
Give every dollar a name.
Mike Lester (12:18):
Every dollar a name, and then budget for us. We’re fortunate, most of us, we don’t live that way. We have this relationship typically with our bank account, which is also a relationship with our income, where we have a pretty good idea of how much we can spend. And then if we spend maybe too much, or we want to spend more than we normally do, we go back and look at our investments. We go back and look at our portfolio to make some adjustments over time.
Mike Lester (12:42):
And so, when we’re sitting down with individuals and we ask them, because it’s important, what are your expenses right now? What is your cost of living? Usually they’ll just round off to a number. A couple of times, Kristen, in all the 20 something years I’ve been doing this, somebody’s come back to me and go, “I spend $8,756 a month.” That doesn’t happen. People usually aren’t that keyed in. They just spend less than they’re making and their bank accounts typically go up over time.
Mike Lester (13:14):
So, here’s the thing. If you base it on your current cost of living, every year moving forward, you’re going to be off a little bit.
Mike Lester (13:23):
Because of inflation. Things don’t get less expensive over time, they get more expensive over time. So, we want to know what your current cost of living is because we have to look at that just this year, but then the next year we want to increase that by 3%, and the next year 3%, and the next year 3%.
Mike Lester (13:40):
Because your cost of living is going up every single year. Literally, this is probably my number one complaint about the advisors out there that are pushing annuities on people, is there’s no cost of living adjustment. It’s very, very short sided. They’re taking a look at their portfolio and there’s some scare tactics usually in there a little bit. And the advisor’s going, hey, if you put your money in this annuity, you’re guaranteed, pick a number, but I’m going to say, you’re guaranteed $5,000 a year for the rest of your life.
Sounds pretty good.
Mike Lester (14:11):
Yeah, it’s short-term gratification. That’s not necessarily a good thing. Well, I’m going to get $5,000 a month this year, but then as I move forward, it starts getting eroded by inflation, and then it starts getting eroded by taxes. And then pretty soon in 10 years, and then 15 years, and then 20 years, my standard of living is going down because my income isn’t keeping up with inflation.
Mike Lester (14:33):
So, we have to be really, really careful in the planning process to help individuals understand how that’s going to work over time and how their income is going to work over time.
Mike Lester (14:42):
Chris and I sat through a presentation here, good guy and a friend. We just differ on our opinion on how money should be invested, and he’s more an annuities guy. And he really, really wanted to show me his presentation on annuities, and why he was so just adamant that people could use annuities to generate an income stream for the rest of their lives. And he walks me through the entire presentation. We went step by step, and it’s this thing called a bucket approach. Some of our listeners may have seen this. But, you put some money here and you spend it down, you spend a down, you spend it down.
Mike Lester (15:14):
I sat with them for about 45 minutes and he showed me this, because I think he thought I was going to be like, wow, that’s great.
You’re going to change your mind, or something.
Mike Lester (15:20):
I’m going to change my mind or something. And at the end I just said, “Okay. Yeah. I agree. Income for the rest of their life.” I’m like, “What happened to all their money?” And he said, “Well, they don’t ask that question.”
Mike Lester (15:34):
And I was like, “Well, if I’m sitting across from you, that’s the first question I’m going to ask.”
Mike Lester (15:39):
Like, where’d my money go? I’m like, “So, what if they ask you that question?” And he says, “Oh well, I just tell them, you’ll have whatever’s left in this account, and whatever’s left in that account, and whatever’s left in that account.” I’m like, “Well, did you tell them it’s likely to be nothing?” He’s like, “Well, they don’t ask that question.” Yeah.
Mike Lester (15:56):
So, Kristen, the financial services industry and things like certainly investing, but investing for growth, investing to offset things like taxes, investing to offset things like inflation, it’s all really, really important. And an advisor can spin it any way they want, but you got to understand, what’s my result over time. What’s my result now? What’s my result on my income over the next 20, 30 years? What about inflation and taxes? And what’s the result at the end?
Mike Lester (16:25):
And again, good guy. But what I told him is like, “Frankly, I could not sit down with my clients and tell them that they’re going to get income for the rest of their life, but your beneficiaries are going to get zero.”
Mike Lester (16:35):
I just couldn’t do that.
That would keep you up at night.
Mike Lester (16:36):
It’d keep me up at night.
And, you’re a fiduciary and that’s not okay.
Mike Lester (16:40):
I would actually have to tell him that.
Mike Lester (16:42):
And so, that’s a difference of opinion. But as an investor, as a retiree, you got to find out what’s going to work best for you. And it takes talking to somebody who’s going to show you the advantages and disadvantages of everything that’s available to you, and who’s just going to help you make an informed decision.
If you would like to have a comprehensive financial plan and an analysis of your current portfolio, go ahead and visit our website at retirement.tips/plan, and we can do that for you complimentary.
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Thanks for tuning into today’s show, and we’ll see you next time on the Retirement Wealth podcast. Exposure to ideas and financial vehicles discussed should not be considered investment advice, or recommendation to buy or sell any financial vehicle. This information should not be considered tax or legal advice. Individuals should consult with professionals specializing in the fields of tax, legal, accounting, or investments regarding the applicability of this information to their situation. Past performance is not a guarantee of future results. Investments may fluctuate and when redeemed, may be worth more or less than originally invested.