Paul Winkler: You’d have to be under a rock not to be seeing what’s going on in California right now. Unreal to watch what has been happening, and just listen to the newscasts. It’s been mind-boggling.
Insurance Companies Dropping People
The thing that people keep asking me about is just like, what on earth happens? Well, there was an interesting piece in the Wall Street Journal about that.
What do you do? Do you rebuild this thing? How are they going to do that?
Because a lot of these people were not insured, of course. I’ve done past shows where I’ve talked a little bit about the insurance market. It’s just weird right now in general.
A lot of people are getting increases, significant increases. Claims, I’ve talked a little bit about some of the things that you have to really watch out for.
You don’t absolutely need to file claims. Boy, I’ve had people, they call an adjuster and the adjuster comes out and looks at it and goes, “Eh, there’s not really a claim here.” It didn’t matter.
That actually goes against you when it comes to your claims record. A lot of insurance companies are literally canceling people because they’ve had too many “claims,” even though an adjuster just came out and said, “You don’t have a claim.”
They’re getting canceled and they’re having to struggle to find somebody that will insure them in the circumstances. Insurance companies, it used to be, back years ago, it used to be that if you were, let’s say, loyal to your insurance company and you stayed with them for a good many years, a lot of people just wouldn’t leave.
Remember, I sold auto and homeowners insurance back in my early days of my career. I sold insurances.
For me, it was hard to get people to change insurance companies because they’d go, “I’ve been with these guys forever. I don’t think I want to go change to Paul. I like you. You’re great and you’re nice and everything, but I don’t think so.”
It was really difficult for me to actually sell anything because people were very, very loyal to their insurance companies because they actually looked at their insurance companies as being loyal to them. Well, now we know, there was something in Consumer Reports, I guess it was — I think it was Consumer Reports — they were actually talking about how insurance companies are just no longer loyal like they used to be.
They’ll come and drop you at the drop of a hat. That’s exactly what happened to many people. I’ve seen it over and over again.
Well, the California insurance market has been really, really weird because you have literally insurance companies dropping these people like crazy, getting out of the market. We’ve seen that.
They said in the Wall Street Journal, you’ve got this shrinking California insurance market, and it’s leaving Los Angeles residents dependent upon federal programs, charitable aid, and their own savings to literally rebuild after what is being deemed as the most expensive fire in U.S. history. $50 billion with a B in losses.
They’re figuring the recovery is going to take years. They’re saying that some of the people are just going to have to sell the land beneath their former homes and just leave. Who knows who’s going to end up buying that?
Nick and I were talking about that. Who’s going to buy it? Corporations? Who knows?
I don’t know. I don’t like to predict the future because I’m terrible at it like everybody else.
Homeowners Insurance
Insurance could cover about $20 billion of the fire’s losses. See, you got about 40% maybe being covered by the insurance companies, actually more than I thought would be.
Banks typically require homeowners to buy this stuff. If you have a loan on your property, the bank is going to go, “Hey, we don’t want you going uninsured,” because if you lose your home, you’re not going to repay your mortgage payment because you don’t have the money, and you don’t have the home anymore.
But literally 12%, a little over one in 10 people in America, don’t even buy homeowners insurance.
I thought that was shocking. A lot of people don’t have it at all.
You go, “Well, why? What’s going on here?” Well, a lot of people, if they’ve got their mortgage paid off, they’re not required to have homeowners insurance, so they just forgo it.
I think that, to me, one of the biggest issues you’re dealing with when it comes to homeowners insurance, quite frankly, is liability. If somebody gets hurt on your property, you can have some serious problems.
I’m telling people, get umbrella policies. Your homeowners insurance may only cover $250,000 if somebody sues you.
Well, nobody sues for $250,000 anymore. If you’re left with that amount of insurance on your home and all of a sudden somebody comes in and sues for three-quarters of a million, the other half a million dollars comes out of your pocket.
Umbrella policies — a lot of people are forgoing them. Not only do they lose their homes, but they also, if somebody gets hurt on their property, they can get sued.
There’s another problem. What’s happening is a lot of the big insurance companies have been in California pulling back because of storms and fires. They said that in California, 69% of those in the Pacific Palisades neighborhood, which was hit, State Farm basically said that they wouldn’t renew them, is really what happened.
In California, you also have this program, I think it’s called the FAIR program. A lot of people don’t have any insurance at all through a regular type of insurance company, so they’re going on different types of insurance for themselves, and they’re having to rely on the government.
You go, good grief, I guess you’ve got emergency assistance from taxpayers, and then you’ve got a little bit of money coming from the insurance company, a lot, 40% of the money coming from insurance companies. But, then you have charities coming in and helping out, and you just don’t know how that’s going to go.
But I think, wow, can you imagine being in this position? I think from my standpoint, as I read this and I look at this, I go, wow, shocking that, that many people are going uninsured in that marketplace. Obviously prayers to those people. Wow, really, really difficult.
Interest Rates
Now, another thing that’s been talked about in the news this week is interest rates. Now, I’ve been talking a little bit about interest rates, the debt and those types of things.
For quite a while, we had this really weird thing going on in our financial markets. We had kind of like a smile-shaped curve when it came to interest rates. Now, normally you have an upward-sloping yield curve. In other words, when I look at borrowing money for a short period of time, I can usually get it at a lower interest rate than if I borrow it for a long period of time.
Let’s say I get a 30-year mortgage, my interest rate’s going to be higher than it’s going to be for a 15-year mortgage, typically. If I borrow money for a couple of months or six months, I’ll typically get a lower interest rate than if I get it for a longer period of time.
That’s exactly what the government normally deals with. They’ll have treasury bills, that’s very, very short-term money being borrowed. Then you’ll have treasury notes where you get into the 10-year range.
Then you have treasury bonds above 10 years, so the bonds will be the long-term things. Typically you’ll have the bonds, you’ll have a higher interest rate because it’s longer-term borrowing than you’ll find with treasury bills.
There’s been this really weird situation where the very short-term interest rates were as high, if not higher than the 30-year bonds.
You go, what on earth is going on there? Some people have used that, errantly, to try to predict where the stock market’s going to go. They use that and they say, “Hey, long term interest rates are lower than short-term interest rates and that bodes poorly.”
It used to be something that was a pretty good indicator, but only in hindsight can you look at it and say it’s a good indicator. That’s what we do, we look at maybe what patterns in the past may tell us what’s going to happen in the future.
Well, what has been happening recently is the yield curve has been steepening some, so that’s been a topic of conversation on the financial channels. They’re talking a little bit about interest rates on CNBC. I’m just going to play this little clip here and then talk a little bit about it.
CNBC: Yes, it’s not good. I remember in the ’90s when we had this going up and up and a lot of those bond auctions, and every time we had an auction and every time interest rates went higher, people sold stocks. Then you take a look at what happened in the ’90s to stocks and you just say, how, see in time, what are those little blips down? Those little blips down were increases in interest rates.
PW: Yeah. You look at the ’90s when interest rates went up, and this is where I really warn people not to try to use what’s happening in markets in the short run to predict the long run.
Now, he talked about these little blips, and what he’s talking about there is just, I want you to imagine a mountain chart. You’ve seen mountain charts in the stock market. A dollar invested in the S&P 500 in 1926, $1 is $14,000 right now.
It’s just like, whoa. $1 invested in small-cap stocks is like $40,000 right now. You look at that and say, “Oh my goodness.”
Blips on a Stock Market Chart
I remember asking somebody at a conference one time, Ibbotson was there, and Ibbotson, you see Ibbotson and Sinquefield, those were the two guys that did all the research on the stock market going back to the 1920s. I asked them, “Why did you use the period of time that you did?”
They said, “Well, in the 1920s, you had the big run-up in the markets. You had the roaring ’20s. Then in the ’30s you had the Depression, then you had World War II, then you had the Korean War, and then the Cuban Missile Crisis, then you had the Vietnam War, and then you had the oil crisis.
“We’ve had so much stuff that has gone wrong in the past century, and especially if you go back to that particular time in history, the 1920s, we had good enough data from that period of time until now. But we also had so many things that were really, really outlandish that happened, it gave us an idea how markets would respond no matter what was going on in the economy.” I thought that sounds pretty good, a reasonable explanation for why you use that period of time.
Well, when you look at the stock market charts, you’ll notice that sometimes there are big swings.
Like the Depression was a big swing. The early 1940s, if you look at when we got into World War II, that was a pretty big swing that we had in that point in time. When we came out of the war, because the companies had to revamp what they were producing from tanks to cars and consumer items, that was a pretty big little blip in the economic outlook at that time in the stock market.
Then you have, of course, during the 1970s, the oil crisis, you have some pretty big moves. 1997 was a short-term blip. Then you have 2000, 2002 was a blip in some areas, not all areas of the market. Some areas did okay. Then you had 2008 was another, and then you had COVID-19, that period of time.
We had these blips. But, what he’s talking about right there, what Kramer’s talking about right there is in 2009, you had these blips, or excuse me, the 1990s, you had these little blips, and they look like little pimples on a stock market chart. There were little down dips, and he says, “All of those down dips were all when they raised interest rates.”
Stock Market Movements
I remember I was talking to Michael Del Giorno one day, and he and I got into a conversation. I said, “Michael, the stock market is weird.” We had a market downturn during this period of time.
He calls me up and he says, “Paul, what’s going on?” We’re doing this radio interview, and I said, “Michael, it’s kind of like when you’re 15 feet away from a wall and there’s a mosquito on that wall.”
I said, “What’s it look like?” He says, “A dot.” I said, “Exactly.” I said, “But get it —” Then he goes, and he finishes my sentence, I couldn’t believe it.
He says, “But get it under a microscope.” I said, “You nailed it. That’s exactly where I was going.”
Get it under a microscope and it looks ugly, a mosquito, under a microscope. Ugly. That’s just like the stock market.
When you’re in the midst of a downturn, it’s ugly. You’re hearing people coming out of the woodwork telling you how things are bad and they’re going to get worse.
That is precisely what happens, where people make mistakes, is they go, “Oh, interest rates went up, sell.” They get out, and all of a sudden the market recovers.
If you look at 5% downturns, as I’ve said many times on the show, 5% downturns in the S&P 500 since the 1950s, happen three times a year. Three times every single year. Ten percent downturns once a year on average since the 1950s.
If we look at that and we recognize that market ups and downs and little movements all over the place are normal, they’re not that scary anymore.
But, recognize that these things are often used to try to figure out where things are going to go, and it’s a futile exercise. Always has been.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.