Renowned fund manager Todd M. Schoenberger, founder of LandColt Capital Management, talks with the Opportunist’s Managing Editor Leslie Stone about the pros and cons of quantitative easing, the power of Fedspeak and why the government should take it easy on small business.
Todd M. Schoenberger started his financial services career at Merrill Lynch & Co., where he was a broker specializing in helping individual investors achieve financial independence. He also worked as an institutional trader at Legg Mason Wood Walker, where he was responsible for managing a US $140M fund for several publicly traded technology companies. After the stock market bubble burst, Schoenberger teamed with an institutional mutual fund company named Rydex Funds and trained financial professionals on the intricacies of using leveraged mutual funds inside sophisticated market-timing strategies. He then helped to create AnnuityNetAdvisor.com, an online variable annuity provider specializing in low-cost, investor-friendly insurance products for financial advisors. In 2009, he formed LandColt Capital Management. “I love educating people on investing and I have such a passion for it,” says Schoenberger, who is also an adjunct professor at a small college in Maryland. “I have come to believe that because of the nation’s economic issues and especially with Wall Street being in the crosshairs of the current administration, there is lots of negativity and misinformation about what we do. I enjoy explaining what finance is about because it is the one sector that really does impact every part of your life.”
Schoenberger is also a frequent guest on national TV and he has been featured on CNBC’s Squawk Box and Kudlow & Co., Fox News Channel’s Forbes on FOX and Cavuto on Business, to name a few.
Opportunist: There is much debate about whether Congress should raise the debt ceiling. What do you think, Todd?
Todd Schoenberger: Definitely not. No chance. I mean, it’s no different than if we were talking about an individual who already had too much debt and continued to borrow. Every six months we go through the same charade. It’s a moral hazard for the country. OK, here’s a government that must raise the debt ceiling and yet tax rolls continue to increase. More money is coming in from the tax rolls but where is the money going? Why do we need to raise the debt ceiling? The government can either increase taxes or cut spending. Unfortunately, it will probably be the former and not the latter.
Opportunist: How will the country’s long-term debt affect the markets?
Todd Schoenberger: It will impact the markets based on growth rates. Treasury Secretary Jack Lew says the Federal government will run out of money in a matter of weeks. If we have a government that stops working that will impact four-tenths of 1 percent of the fourth quarter GDP. And guess what is going to happen? The Federal Reserve will continue with QE [quantitative easing].
Opportunist: Has the Fed’s bond-buying program, also known as quantitative easing, been effective thus far?
Todd Schoenberger: QE is here and Americans are feeling a little wealthier because of it. There are two intents of QE. First, it increases the wealth so you have more people spending money and, therefore, you see an increase in demand and businesses have to go out and hire. It’s good to help unemployment and get people back to work. But when we look back and see that QE was implemented in December 2008, we see that it definitely increases spending and the so-called wealth effect but companies don’t hire. In fact, they take more productivity out of their workforce.
Not one soul on Wall Street will confess to the point that the stock market has gone up this year because of QE. The first quarter saw a 3 percent GDP, but the historical average is 7 percent. We are seeing lower GDP rates because Congress cannot get its act together. The Fed has put itself in a corner and cannot do anything unless fiscal policy changes. If they were going to taper they should have done it a year ago.
Opportunist: Will quantitative easing eventually put the housing recovery in jeopardy? What about rising interest rates—now hovering at about 4.8 percent on home mortgages. How will that affect housing?
Todd Schoenberger: QE could help housing. It cannot hurt. But Americans aren’t pulling the trigger to buy. And banks aren’t lending.
Opportunist: Don’t low interest rates make it a good time to buy?
Todd Schoenberger. Yes, but it’s nearly impossible to qualify for a loan unless your credit report is stellar and you have a stable long-term income. I know somebody who has held a job for 30 years and waited four months for approval on a loan—and that was with 50 percent down. QE keeps interest rates low, but it’s not worth the risk for banks to offer loans. The margins are so squeezed as it is that the risk of default is there. Then the bank has to seek a bailout and that would be devastating. The last thing banks want to do is go hat in hand to the Federal government. What TARP did for banks and ‘too big to fail’ is all well and good but banks are much better off taking deposits and offering passbook savings accounts and opening new branches instead. If interest rates go up it might be better for banks but right now interest rates are so low that it’s just not worth it.
The 30-year mortgage is just not there, and Americans are thinking why buy? Maintenance costs continue to rise and property taxes do as well. When you start incorporating the extra costs, would-be buyers think why put yourself in a corner. It’s easier to rent than to buy right now. Americans feel better spending money on big screen TVs than on mortgages.
Opportunist: Investors pulled $20.3 billion from bond funds in September. Do you see these withdrawals going into equities?
Todd Schoenberger: Oh yes, definitely. We had a very solid month in equities from what we have typically seen in September, so that has been good. The S&P is up 3.7 percent through yesterday for the month. The historical average is 0.6 percent. It has left bond funds and gone into equities and individual equities. Chances are it will continue and I don’t see that ending anytime soon.
Opportunist: What are the long-term effects?
Todd Schoenberger: We are setting ourselves up for an equity bubble. Here’s the thing about trading the stock market these days: the old school method of fundamental analysis and looking at the bottom line, the balance sheet and P/E ratios does not matter anymore. It’s based entirely on the Federal Reserve. There is more movement and influence from Fedspeak than from what we got off macro reports. It’s all based on what the Fed is going to do. If the Fed were to begin tapering, the exit strategy has begun. Investors would then need to get out of equities, look into their gains and go into cash. Right now that is not happening. The Federal Reserve will continue its current monetary policy. When you see that as being the driving force for equities, the Fed is the most influential trader, if you will, on Wall Street because they do what they do and we see it in Fedspeak. When Jeffrey Lacker [Chairman of the Federal Reserve Bank in Richmond, Va.] gives a speech at a college it influences the market much more than the number of shoes Nike sold last month. And it’s based entirely on QE and that’s a dangerous path. It’s dangerous because it takes away the soul and the structure of investing in stocks. Larry Kudlow is always on TV saying earnings are the ‘mother’s milk of stocks.’ Yeah, that was true 20 years ago but not today.
Opportunist: Why not?
Todd Schoenberger: If that were the case the stock market would be flat this year because earnings have been flat. It’s all based on what happens at the Fed. It changes the entire mindset of investing and it changes how future generations will construct portfolios. People leaving bond funds and going into equities know that when Ben Bernanke and company turn off the spigot for QE that’s the time to get out of equities. You don’t want to be in equities at that point. If you are in equities at that point you are asking for trouble.
Opportunist: We noticed that the stock market moved based on Lawrence Summers withdrawing his name for the Fed chairmanship.
Todd Schoenberger: Here’s the thing. The seasoned professional understands the long-term implications of current QE programs. The younger professionals see that $3 trillion has been pumped into the economy and think this is great … let’s just keep it going forever and ever. But nothing lasts forever and eventually you hit a wall. When Larry Summers pulled himself out the stock market went up because Janet Yellen, a Ben Bernanke fan, is more than willing to continue Ben’s policies. Current QE-Infinity will continue at least for the foreseeable future with her in place. Larry Summers ruffles feathers and says things the wrong way and he’s a little edgy but he knows you cannot continue this. When Larry Summers left people said ‘OK, QE is here to stay and everything is great.’
Opportunist: Who would you like to see as the next Chairman of the Federal Reserve?
Todd Schoenberger: The list of potential candidates is very short, which makes it troubling to me. I wanted Larry Summers and I thought he would have been great in the position. He seems to be the complete opposite of Ben Bernanke, and his press conferences would have been entertaining. Who else is out there? I think that’s why the President hasn’t picked anybody yet. I would much rather see Larry Summers, so I don’t have a favorite.
Opportunist: You were recently quoted as saying the U.S. labor market remains ‘stuck in quicksand.’ Do you have any ideas on how the country can get unemployed and underemployed Americans back to work?
Todd Schoenberger: Here’s a crazy statistic going back to 1990: Two-thirds of all jobs were created in this country from the small business owner, not from the giant conglomerates. So, if we want to improve employment in this country, we need to make it easier to start a business—and this is not just from a regulatory standpoint but also from a capital standpoint. People cannot raise money anymore. The guy who wants to open the corner Exxon store needs about $200,000 to do that. But the banks won’t loan him the money. So where is he going to get the cash? If he’s lucky enough to get the money to open up the business, then he has to worry about the Affordable Care Act, the rising personal income tax and so forth. The State of Maryland—I was born and raised in Baltimore by the way—used to have a millionaire’s tax that said if you made over $1 million in personal adjusted gross income you were taxed an extra 1.5 percent. Then, just last year, those same criteria were pushed all the way down to the guy making $100,000 per year. If, as a small business owner, you’re taxed more why would you go out and hire? That tax is somebody’s paycheck. You have to lighten up on the regulatory issues, open up levels of credit for small businesses and lower taxes for small business owners. That’s the only way you’re going to see an increase in hiring; there is absolutely no doubt about it. It won’t happen under the current administration—and I am not trying to raise politics here—but I think the handwriting is on the wall.
Opportunist: How did you become interested in investing?
Todd Schoenberger: Well, it really started back when I was a teenager and my father was employed with Ma Bell. When the Bell System monopoly was broken up back in the early 1980s, he received stock in all the regional Bell companies. But as a blue-collar worker, he wasn’t very familiar with stocks and he had trouble reading the stock tables in the newspaper. So the two of us read them together and that became a passion for me through my teen years and put me on the road to Wall Street. I ended up interning at the local Merrill Lynch office in Baltimore, and my first real job was at T. Rowe Price.
Opportunist: What made you decide to launch LandColt Capital?
Todd Schoenberger: I was running the brokerage division of USAA in San Antonio and one of my jobs there was to create new products for the members. USAA is a Fortune 200 company that caters to military and their families. I wanted to create an investment model that was very easy to understand and also very transparent so that a 19-year-old enlisted soldier fighting in Afghanistan could understand what was going on. Several people within the organization beta tested it and it worked for them. So I left there and launched LandColt and then created this investment model and added precious metals and real estate as well. That is the culmination of the LandColt onshore fund that exists today.
Opportunist: As a fund manager and investor, what’s your greatest fear in the markets right now?
Todd Schoenberger: What keeps me up at night is the realization that we have almost reached what I call a sentiment bubble. People are getting their quarterly 401(k) statements and seeing a couple more dollars, we have a stock market that has done well this year and from a wealth manufacturing standpoint the average American is doing pretty good. Spending is up again but the debt-to-income ratio is starting to creep up too. When I consider the fractured status of Capitol Hill, the conversations about potential shutdown in government and the price tags associated with the Affordable Care Act and the current GDP of 2.5 percent it makes me quite worried.
Opportunist: As we enter the new fiscal year, what are your thoughts on the U.S. economy?
Todd Schoenberger: The foundation of the U.S. economy is on toothpicks and if it crumbles it’s going to get ugly. These aren’t normal times. We have countless amounts of people on food stamps and we still have high unemployment. We need an economy that is growing organically at 5 percent or more each year. Without the help of the Federal Reserve it would be in desperate condition. After $3.7 trillion in QE programs and numerous stimulus programs presented by the White House, we still only have a growth rate of 2.5 percent. Nothing is happening. And when you incorporate ancillary issues such as economic turmoil in Europe and geopolitical tension in the Middle East that could affect oil and the wallets of Americans, ay, ay, ay, we are in for some tough times. Sentiment stinks and the only thing that really keeps people from being depressed is the stock market. The problem is that the average American cannot understand that. They turn on TV and see Brian Williams talk about how bad things are and then he cuts to a commercial break and they see an advertisement for the brand-new iPhone from Apple. People are so jaded that they don’t believe things are that bad. I am very nervous about it. Based on all the headwinds we are about to face, I believe people should be cautious as we go into 2014. Cash is king, so start piling up the cash.
Follow Todd Schoenberger on Twitter @TMSchoenberger
Visit LandColt Capital Management - http://www.landcoltcapital.com/
Watch Todd Schoenberger on FOX Business Network - http://video.foxbusiness.com/v/2634499145001/a-traders-perspective-on-syria/
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in Florida. Follow her on Twitter at @les7989.