Robert Zuccaro – Why this is the Worst Environment for Bond Investors

Interview Transcript of: Robert Zuccaro – Why this is the Worst Environment for Bond Investors

Aaron: Hey, welcome to American dreams. I’m here today, right now with Robert SU carro and he is one of our investment market gurus out there. And I’m how are you doing today, Robert?

Robert: Very well.

Aaron: So w what’s your perspective on inflation and what’s going on in the country?

Robert: Okay. During our last interview, I sounded the alarm on inflation and did a paper in July of last year stating that a transitory inflation is wishful thinking. And the reason I was pessimistic on inflation is that first, the department of labor has continuously been under reporting inflation for the past year. The latest report shows inflation is up on an annual basis. 12. 8.3%. They have ranked going up 5.1% of the past year. If you look at the apartment list, national surveyor branch, they have going over the past 12 months of 17%, has inflation going up 16.8%.

So rent is a very important component of the CPI constitutes a 32% of the overall. In terms of energy, the government claims that aren’t cheap prices were up 23%. Natural gas has doubled in price in this year. Gasoline’s up 55% over the past 12 months. And The heating oil is up 70%. So there’s no way in a world that we get to the numbers that are being reported.

In addition to that food inflation is reported to be up 9.1% Tyson foods, which is a major food supplier reported that as raised prices on pork 38% over the past year. 33% on beef. The United nations reports food inflation worldwide over the past 12 months is running at 33%. So inflation is a lot worse than we’re being led to believe.

And at the moment we are in the worst environment in history for bond investors. Because as of this morning, 10 year bonds were yielding 2.8%. The government reports inflation has been running at 8.3%. We think it’s closer to 14, 15%, which means there is a loss in real terms of at least 10% taking place and bond investors in a current environment are, are being eaten alive.

Aaron: What would you estimate the actual inflation?

Robert: Our work shows 14 to 15% using more realistic assumptions for right more realistic assumptions. The food prices consumers know what I’m talking about. They go to the market once or twice a week and they see prices going up right before their eyes from a personal experience, I bought a case of water yesterday.

That case of water was 7.49. The last time I bought it a month ago it was 5.78. So that commodity of by itself, where that product by itself is up more than 25%. A bottle of Coca-Cola a real bottle, not a container of 12 ounce bottle, where some are used to sell for. $1 that same bottle today is on sale in supermarkets at a 1.88.

Now there’s a silver lining in inflation during the 1970s, we had a high inflation period in that type of environment. Companies raised prices to keep up with inflation in this environment. Something entirely different is taking place. Not only are companies raising prices to protect margins, they are also raising prices to expand margins.

For example in the first quarter early estimates for corporate profits S and P 500 earnings per share specifically were expected to expand by 4.7% with 95% of S and P companies report. The first quarter growth right now stands at 11.1%. So businesses have done a good job in dealing with the adversity of inflation and dealing with higher fuel prices and also higher labor costs.

Corporate America, a small company. America is absolutely drilling on how they run their businesses. American business men and American business woman can adjust to all types of economic conditions. High inflation low inflation, high oil prices, low oil prices, strong dollar, weak dollar, and so forth. And they are doing this today and doing a good job of it.

Aaron: So going back to the department of labor, understand inflation, is it, I mean, are they just trying to. Keep panic under control, or is this politically driven or are they just using some type of different model that eliminates a lot of the different factors that we just talked about?

Robert: The CPI is being purposely under reported because if the true rate of inflation was reported the government would have to pay out more cost of living allowances. As of September 30th, the government count calculated 12 month inflation at 5.9%, which was running probably double that social security recipients.

Or peg to the increase of the CPI in their payouts. If the government had to pay the actual rate of inflation, it means that they would have had to fork over to 70 million retire is another $75 million. In addition to social security payments, which exceed $1 trillion, you have at least five other programs. That are geared to core. One is better veterans’ benefits. Another is the snap program, which we used to refer to as food stamps. They are all indexed to inflation. If the government reported the true rate of inflation to federal deficit, it would be a lot greater than it is.

Aaron: So basically it’s because they’d be insolvent basically.

Robert: Well, they’re, they, they have a difficulty with the budget. As you know, we’ve been running a multi trillion dollar deficit for the first time in history, and it would only aggregate aggravate an agregious problem, which we have. And let’s talk about the national. At the end of the Bush administration in 2000, the national debt was $5 trillion.

It took us a 225 years to amass the national debt of $5 trillion. Today, the national debt exceeds $30 trillion in 21 short years. We have created additional national debt of $25 trillion at some point down the road when interest rates go up and when they go way up, the federal government is going to have great difficulty in financing their debt.

They will finance the debt because they have to, in order to protect The obligations to credit holders. And that means if they pay more to service that there’s less money for social programs, for social security, Medicaid, Medicare, and all the other government programs.

Aaron: Okay. Now not all the companies are doing too well right now. Like thang, for example, involves, Facebook, Amazon, apple, Netflix, Google. I mean, what’s going on with them? They’re getting hit pretty hard.

Robert: Okay. There was a major story here and a story has to do with the seismic shift in big tech fortunes. The fan companies, which are Facebook now called better apple, Amazon, Netflix, and Google last year had average revenue growth of 30% on average and 38% profits growth.

In the first quarter, these growth rates fell so far. And most investors are aware of this, these same companies, which have had meteoric growth for five years and have generalized a collective annualized return of 25% per year. Over five years, their revenues grew only 5% in the first quarter. And earnings per share growth.

2% to group of stocks about down 36% on a year. And these five companies have a major influence on American business because they constitute 18% of the overall way of the S and P 500. So The decline in big tech shares is warranted. And I, think it’s going to continue because the economic circumstances has dramatically shifted for the Fang stocks.

They are no longer the growth vehicles that we’ve been accustomed to seeing over the past five years.

Aaron: Okay. So I believe back in November I guess the advice that we are being given out there was look, just stick with the NASDAQ, tech is going to continue to leverage and be able to adapt. Is that still what you would suggest? Or should we be looking more towards the blue chip stocks or mid markets or small cap?

Robert: I paint in a bleak scenario of, for five companies. But if you look at the aggregate of tech companies, which make up 36% of the S and P today, according to what calculations and 60% of the NASDAQ tech we’ll still continue to lead the way. Tech is where the innovative companies are. Tech is where the knowledge base of America is. We are an intellectual asset society today and intellectual assets grow faster than a physical product. It’s just that the universe, that which has dramatically out distance, the SMP since the NASDAQ composite was introduced on February 6th, 1971.

The NASDAQ that before dividend considerations, because we don’t include total return for the NASDAQ, but on an index basis since 1971, the NASDAQ has gone up 163 times versus 41 times for the S and P 500 index alone. So tech will lead, but it’s advantage over the S and P 500. The NASDAQ advantage will be less than it has been over the past 10 years, whereas tech or their NASDAQ has provided a 500% cumulative return versus 363%, of the S and P 500 return.

Aaron: Okay, great. So do you see us heading into recession? I mean, we’re, obviously it looks like bear market right now, going up and down has been hugely volatile last couple months.

Robert: I think the current downturn, which started for the S and P on January 3rd and for the NASDAQ and most growth fund started in November of last year.

But the NASDAQ through Friday’s closed down 29% the Russell 100 1000 growth index is down 21% on an intraday basis, the NASDAQ or the S and P 500. Moved into bear territory last week, as of Friday’s close, it recovered

Wednesday through Friday of last week and is now down 13% of the year concerns are inflation, rising interest rates and recession, we’ve talked about inflation and how businesses are moving to protect and expand margins. Many investors today have like a 10 or 15 year perspective where we’ve been in a very low rate environment. But if you look back historically interest rates on. Have been much higher than they are today.

The 30 year treasury bond has average since 1960 or 4.5% yield. We are well below that today on the tenure 2.8%, the fed has enough room to continue raising interest rates. In this environment before it adversely affects economic growth by sending the economy into recession right now, the economy is very strong.

The owner employment rate is at a very historically low. Of 3.5%, the best indicators that I found in evaluating the strength of the economy or the ism readings every month on manufacturing and the service sector. And as of last report services were expanding at a 58%, right. Versus 56% for the manufacturing index.

And anything above a reading of 50 shows expansion. So as of now, the economy still continues to expand that a healthy rate, unlike others thinking that we were gonna end up recession. I think others have not looked at the history of economic cycles. We have had 32 economic cycles since 1850. And three of the longest economic cycles have occurred over the past 30 years during the 1990s, the expansion lasted 10 years, the most recent expansion, which only ended as the pandemic struck in February of 2020.

Ran one month short of a record 11 year run. So what we are witnessing in the economy, as long as you can longer economic expansions, this expansion is just about two years old. I think it has many more legs to run and I wouldn’t expect to see a recession for, we use two to three years out.

Aaron: Well, thank you. Robert has been great having you on the program again, parting thoughts?

Robert: Yeah. I’d say, you know stay where you are. Don’t make too many changes. The economy will do okay for the balance of the year. And I would expect that the worst of the downturn. Is behind us. And as long as the economy continues to grow, which I think it will.

And corporate profits continue to expand, we should reach record levels in 2022, I think we will make money and get recover some of our horses before

the year is out. And as always Aaron it’s I’m always delighted to be on your program. Thank you.

Aaron: It’s great to have you, once again, this was Robert Zuccaro of golden Eagle strategies.


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This transcript was generated by software and may not accurately reflect exactly what was said.

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    Robert Zuccaro on Alan Olsen's American Dreams Radio
    Robert Zuccaro

    Robert Zuccaro, upon his elevation to portfolio manager of the Axe Houghton Stock Fund in 1978, was an early pioneer in applying quantitative disciplines in stock selection. He gravitated toward a quant process given the inherent shortcomings in fundamental decision-making. Thus, investing on facts won out over investing on opinions.

    Robert founded Target Investors in 1983 to manage institutional pension accounts, still using a quant process. During the next two decades, Target Investors was cited for its performance in publications including Financial World, Money Magazine, Business Week, The Wall Street Journal, New York Times, Investor’s Business Daily and USA Today.

    Target QR Strategies was formed by Robert in 2013 to formalize his research and manage family assets. He now manages an aggressive growth equity strategy relying on quantitative disciplines developed over forty years and through 1,000 studies.

    During 1978-1983, outperformed the S&P 500 for six straight years managing the Axe Houghton Stock Fund

    Recipient of INDATA award to Target Investors for the #1 pension account (+79%) among more than 3,000 accounts in 1992

    Awarded a certificate by the Lipper Fund Survey for managing Grand Prix Fund to the #1 rank (+112%) among all growth funds in 1998

    Cited by CDA/Cadence Technologies as the #1 institutional manager for its composite annualized return over five years ending 1993.

    Bio Courtesy of

    Alan Olsen on Alan Olsen's American Dreams Radio
    Alan Olsen

    Alan is managing partner at Greenstein, Rogoff, Olsen & Co., LLP, (GROCO) and is a respected leader in his field. He is also the radio show host to American Dreams. Alan’s CPA firm resides in the San Francisco Bay Area and serves some of the most influential Venture Capitalist in the world. GROCO’s affluent CPA core competency is advising High Net Worth individual clients in tax and financial strategies. Alan is a current member of the Stanford Institute for Economic Policy Research (S.I.E.P.R.) SIEPR’s goal is to improve long-term economic policy. Alan has more than 25 years of experience in public accounting and develops innovative financial strategies for business enterprises. Alan also serves on President Kim Clark’s BYU-Idaho Advancement council. (President Clark lead the Harvard Business School programs for 30 years prior to joining BYU-idaho. As a specialist in income tax, Alan frequently lectures and writes articles about tax issues for professional organizations and community groups. He also teaches accounting as a member of the adjunct faculty at Ohlone College.

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