Matt Benjamin: Good morning, and welcome to this week’s edition of Market Wake-Up Call. I’m your host, Matt Benjamin, Editorial Director here at The Oxford Club. And our guest this week is Bond Strategist of The Oxford Club, Steve McDonald. Steve’s here to follow up on predictions and calls that he made in a recent webinar about rates and how the markets would react to them. Welcome, Steve.

Steve McDonald: Thank you, Matt. Thanks for doing this.

Matt Benjamin: Now, you said in your mid-September webinar that the market was primed for a sell-off and that it was all about interest rates. And boom, the 10-year benchmark Treasury shot up to what? The mid-3% range? It’s 3.3% to 3.4%, I think. It’s maybe a little bit higher than that today. That’s up from lows in the 1.5% area. And stocks took a real hit – a real bath – just like you predicted. What’s going on here, Steve? Are you a genius? A soothsayer? Fortune-teller?

Steve McDonald: Don’t let my ex-wife hear you calling me a genius. Trust me.

Matt Benjamin: You really nailed this one. What’s going on? Tell us about it.

Steve McDonald: Well, it doesn’t take brain surgery to look back at the history of the markets and see that any time interest rates get down here, the market gets up here.

Matt Benjamin: Right.

Steve McDonald: When those interest rates start to move up, the market does this. The problem is this: Most of the people who read our stuff and who watch this are easily older than 55 or 60.

Matt Benjamin: Right.

Steve McDonald: And it isn’t that the stock market’s going to stay down forever. We know it’s not. The problem here, and what I try to get people to understand, is: As you age, you’ve got to reduce the risk in your portfolio. I say you have to have your age. Whether you’re 60 or 65, you should have 60% or 65% of low-risk investments. Whatever your age is, hold that number of low-risk investments in your portfolio. In this case, I like corporate bonds.

Now, if you don’t do this, we get into the situation where we are now – the stock market is coming down as the rates are coming up, and we could have several years of really volatile markets. And that does two things. One, it scares people and they panic-sell. That accounts for almost all losses for the small guy.

And the other thing it does is this: You get into a situation where you have multiple years later in life where you have no growth or negative growth. And then what happens is, down the road, in our 70s and our 80s, we lost all this money that we could have had growing for us. And that means lower capital gains and lower income.

It’s a totally predictable mess. I said in the webinar when I started talking to George Rayburn about this that this is totally preventable, but you have to make the changes. You’ve got to get into bonds. You’ve got to start reducing your risk in your portfolio.

Matt Benjamin: Okay. So, Steve, we’ve established you’re a genius.

Steve McDonald: Stop.

Matt Benjamin: But I’m not sure how to monetize that. Tell us exactly how to go about this situation. How do we benefit from the shift in Treasury rates and the Treasury market?

Steve McDonald: Well, this is actually the salvation of people like myself – anybody say, older than 60. I turned 65 last month. I started this shift. And this is what I recommended to people about three years ago, or anytime I had a decent profit or loss. Most of my losses, of course, were in biotech, technology, small cap, that sort of thing.

When I got out of it, I started shifting to lower risk. My portfolio now is made up of corporate bonds and big successful companies that have paid and increased their dividends for a long time. I would say 70% of my money is in that sort of thing now. Now what does this market do for you?

What we’re actually doing is using what I call “the staggered portfolio,” where you have money coming due every year from your bonds and money coming in from your dividends. If you don’t need that yet for your income, the maturing bonds is what I’m talking about, you take that money. And as the market interest rates move up, you take money every year, you go back into the market and you buy higher yields.

If you do this – if you buy those higher yields as your bonds come due every year, or mature rather – you’re going to increase your returns as the market rates increase as well. I said when I started this that it’s not brain surgery. If you sit down and just look at the mechanics, this works.

Matt Benjamin: Right.

Steve McDonald: You know, it feels so good too, Matt. I wrote a piece. – I don’t know if it’s come out yet – where I said, you know, I feel like Hannibal Smith in The A-Team. You might be too young to remember The A-Team.

Matt Benjamin: No, I remember it. I loved that show.

Steve McDonald: Yeah, and he used to say, “I love when a plan comes together.” I’ve been telling people now for a couple of years that this is coming. You’ve got to be prepared for it. And if you don’t make the shift, you’re going to be a victim again. And it’s going to happen.

Matt Benjamin: Sure, sure. I love that show, Steve. I love Mr. T. and Hannibal. All of that.

Steve McDonald: Oh, that’s right. I forgot about Mr. T.

Matt Benjamin: So, Steve, you’re a fortune-teller. Now I’m going to ask you for another prediction. Are we headed now for another 2008 or even a 1994 when rates went nuts and the market fell 30% to 35%?

Steve McDonald: No, no we’re not. And in fact, Alexander Green, our Chief Investment Strategist here at the Club, just nails this right on the head. We’ve got the strongest economy since I was 15 years old. Think about that.

Matt Benjamin: Right.

Steve McDonald: I’m 65. This is the strongest economy in 50 years. We have great jobs numbers. We have great capital expenditures, which means companies are spending money and reinvesting. We have almost a perfect scenario here. We’ve gotten a little shaken here with this China thing and trade, but that’s going to work out, just like the other ones did.

Matt Benjamin: Yeah.

Steve McDonald: But no, this is not a 2008 because remember: 2008 was precipitated basically by felonies.

Matt Benjamin: Yeah.

Steve McDonald: They were issuing insurance policies, basically, on bonds, but they weren’t being regulated as an insurance company. We had crazy, crazy bank activity –mortgages being given out to people who never should have had them.

So it’s not a 2008. It’s not a 1994 because they’re well ahead of the curve as far as inflation. We’ve already had four interest rate increases, which is driving the 10-year. But they’re ahead of the inflation thing. In ’94, they were afraid it was going to get out of control. I mean, they were still reacting to the late ’70s and early ’80s inflation that we had.

So no, we’re not in that situation. We’re actually in a good situation as long as you start making the changes that you need to make. You’ve got to get into some bonds in your portfolio.

Matt Benjamin: Absolutely, it makes total sense, Steve. And that’s very good advice.

[NONNMT] And I want to thank you for your insights. And I want to say to the folks out there watching, you need to watch Steve’s whole webinar about where this market is going and how to make it work for you. And the link for it is just below, as you can see.

[ALL]Steve, I want to thank you again for coming on Market Wake-Up Call. As always, it’s edifying and insightful to talk to you. So thanks a lot.

Steve McDonald: What does edifying mean, Matt? You brainy guys, you know.

Matt Benjamin: I don’t know. My wife used it this morning.

Steve McDonald: Okay. Thank you so much, Matt.

Matt Benjamin: Okay. Thanks, Steve.

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