Are We Currently in a Recession like 2008? | The Retirement Income Show

Mark Elliot: Glad you’re with us today for The Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. You can always go to the website to learn more, oakharvestfinancialgroup.com, oakharvestfinancialgroup.com. You can always give him a call if you have questions, 800-822-6434, 800-822-6434. Of course, you can always go to the YouTube channel. Just search Oak Harvest and Troy Sharpe and you will find up to 300 videos there and you subscribe.

There’s no cost whatsoever, but that way, you’ll be notified when new ones come out, which are coming out all the time from the team at Oak Harvest. We’re talking about volatilities today. Troy, you started your company back in 2008. Obviously, we know ’07 to March of ’09 was the Great Recession. There’s been a lot of talk that we might be headed into a recession. Typically, we don’t really know we’re in a recession till we’ve come out of the recession. Are there any similarities between ’08 and where we are today?

Troy Sharpe: No, not really, except it feels similar to an extent. It’s more volatile, it seems, over a longer period of time. Now, 2008, especially, I think it was October, November, keep in mind, the recession happened from ’07 to ’09. That was about an 18-month period there. The market took about five years, almost five years to recover its previous levels. We do see, at least to me and I haven’t dug into it, but it feels like without the structural damage that happened in 2008.

What I mean by that is the banking industry was collapsing. If you remember, there were people in lines here in America just to get in and get money out. If I remember correctly, it was about 500 banks went under from 2007 to 2009. Most of those probably happened in ’08, ’09. Many people who had deposits above the FDIC protection limits, which back then, it was $100,000, not $250,000 like it is today, lost everything they had in the bank.
The banking industry was collapsing. The real estate industry was collapsing. Those were structural problems that threw us into recession. Now, we don’t have those same structural problems today. The banking industry is much, much, much healthier due to policy that was put in place after the ’08 crisis. Banks are far more capitalized. Now, banks are still doing tremendously risky, let’s just call them endeavors, with their capital.
They’re far more capitalized, meaning they have more money, but banks still have trillions and trillions of dollars of derivatives in the portfolio. They are taking a tremendous amount of risk, but they are much better capitalized and there are different safeguards that have been put in place to help prevent, to a large degree, much of what happened in 2008. Housing prices. Obviously, I would just call it a bubble.

Housing prices are not designed to go up 15%, 20%, 25%, 30% in some areas, 40%, 50% a year. We don’t have a lot of the same activities that we had back in 2008. Back in ’08, it was the culmination, right? It was happening in ’03, in ’04, in ’05, in ’06. I bought a home. I remember going into the mortgage broker’s office and he was like– I was a young kid back then. ’03, I was out of college for a few years or, no, I was– yes, I was in college still. I didn’t graduate college till ’04.

I bought a home, so I had some student loan money. I had some money I saved up from a job. I went in to apply for the mortgage. I wanted to buy my home instead of rent. I specifically remember the mortgage broker there giving me instructions on how to fill out the application or going through the application process to qualify for the loan. I didn’t have a ton of money saved. I definitely didn’t have 20%.
I don’t remember the exact numbers, but I believe I was working two jobs at the time. I was using some student loan money. I was still in school. I maybe had 2% or 3% of a down payment. No problem. Ended up being able to buy a second home about six months later and then a third home a few months after that. Now, I sold the first one. Back then, it was about $75,000. I gained down that home in about 18 months and the home was only about $250,000, $300,000.

My point with this story is that you had people buying two, three, four, five homes with zero money down or 1%, 2% money down. That’s not going on right now. Now, housing prices will go down. I would not be shocked to see a 20%, 30% decline in home prices over the next two, three, four years. Is it going to lead to the widespread foreclosure mess that we had in 2008? Personally, I do not think so, but very well.

That is one of the headwinds that the economy faces and that is something that could be a problem, but it’s simply not as pervasive as far as the zero money down loans, the zero doc loans that it was in 2008. I’d love to see some data on how many variable rate loans have been issued over the past couple of years because that was a big problem back in 2000 because, again, it led up ’03, ’04, ’05, ’06, and ’07.

Then Wall Street, the investment banks, what they were doing was securitizing those zero down loans. What does that mean? That means that if you have 10,000 people who aren’t qualified to buy a home, they buy a home, it’s a mortgage, okay? The bank owns the mortgage. The consumer is making a payment. What Wall Street did, the investment banks was then, they took those 10,000 mortgages and they put them into a bond, okay?
Ultimately, it’s a mortgage bond. As interest rates rose– Now, let me actually back up here. Because these were zero doc loans, because they were zero money down loans, the interest rates were already higher, but the buyers back then did not anticipate and just like today, honestly, holding them in many regards for 30 years. Everyone was flipping homes. Everyone was flipping homes.

That is kind of similar to maybe what’s going on a little bit now, but it was much, much more pervasive back in that time frame. If you had an interest that was 8% or 7% on your loan back then, it didn’t matter because prices were going up so much. You had people with no income, no jobs, no documentation, getting two, three, four homes and with the plan of flipping them.

Wall Street then took all of those mortgages, combined them into one security, a bond called a mortgage bond, and investors could buy them and receive 7%, 8%, 9%, 10%. Many of those were variable rate loans, so they’re prime plus, meaning whatever the prime rate is plus a certain amount on top. As interest rates rose during that time frame because everything got so hot, those interest payments on those notes ended up increasing.
Then the recession hit, people lost their jobs. They couldn’t make the payments. The renters who were in those homes that were temporarily occupying them while the flippers were waiting for the houses to appreciate in value, they lost their jobs. They couldn’t pay the rent. Then it was this huge cascading impact where, ultimately, this is where Wall Street really screwed up, or at least Lehman Brothers, Bear Stearns, and the Investment banking side of AIG as well.

They got into what’s called credit default swaps. Fancy word for simply saying, “I’m going to make an investment, a bet that these mortgages– if these mortgages default, these mortgage bonds default–” Excuse me. The mortgage holders, if they don’t make their payments, the bond would possibly go to zero. If that happened, the credit default swap paid out. Once all this happened, those credit default swaps, which were trillions of dollars, across many, many balance sheets and the investment from investment banks, it blew up.

Then you had Bear Stearns. You had Lehman Brothers. You had AIG with the bailout, the investment banking side of AIG. It’s important to point out that the insurance side of AIG was never, ever, ever in any type of trouble, but the investment banking side over there absolutely was. Long story short here is that safeguards and mechanisms have been put in place to protect against that.

Now, here we are in 2022 and we’re not losing millions and millions of jobs. Last report I saw was about 11, almost 12 million job openings in this country. We’re seeing a lot of positive signs and corporate earnings. Now, the stock market’s getting killed, of course. It’s just part of the deal when the time that we’re in, but there’s a lot of positive signs coming from corporate earnings.

I’m not saying it’s going to be smooth. We’re going to go straight up from here. We do not expect that at all. It is going to continue to be, we believe, a very choppy, sloppy kind of mess over the next few months. As far as a structural imbalance or worrying about a structural collapse of the banking industry, we do not see that happening. That is not a concern at all of ours.

We actually do expect the market sometime, probably late third quarter, fourth quarter to rally pretty heavily into the end of year. We’ll see what happens. Long story short here, if you have a plan and you’ve had the right discussions with your financial advisor, you know where your income is coming from. You don’t have more at risk than you should. You have a tax plan in place where you’re taking advantage of times like this.
Yes, during times like this, you can implement tax strategies that give you a much greater opportunity over the long run to succeed. There’s a lot of opportunities in time like this to make planning decisions that can benefit your family. Everything we do here, it’s about answering the big questions. Do you have enough? Can you retire? How long will your money last? We want to answer those questions through planning, through an intelligent, disciplined, diversified approach to how we manage that investment portfolio.

It all starts with our Oak Harvest Retirement you’re either getting ahead of yourself. You’re leaving something out. I believe over the long haul without that comprehensive approach, you are costing yourself a significant amount of money. 1-800-822-6434, that is the phone number to reach out to have a conversation. You’re just going to leave your information on our voicemail line here. We don’t have anyone working on the weekend. I like everyone at home working with their families. I do not believe in these call centers.

Whenever you do call here in the week, you will talk to a real person, assuming it’s in normal business hours. Just leave us your information and let’s sit down and see if we’re a good fit for each other, if we can help you, if you’re missing out on planning opportunities during this time. Maybe you’re uncomfortable. You have too much money at risk. You just don’t feel comfortable with what’s going on right now in your current relationship. Now is a great time to explore making a change, 1-800-822-6434. Check out the YouTube channel. Go to Oak Harvest on YouTube and learn on your own time.

Mark: 800-822-6434, no cost to chat with the team. They’re here to help. They just don’t know if they can help you until you reach out, 800-822-6434. There’s a lot of things out of our control. Certainly, one thing that is in your control is actually having a retirement plan. That’s what we’re going to talk about when we come back. This is The Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group.