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Why Treasury Buybacks Are Not a Real Fix for Rising Yields · The Financial Exchange Show

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Speaker 1: Zada and Mark Fandetti.
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Speaker 2: It's Chuck, Mark and Tucker with you today. And I
1:14
Speaker 2: came in this morning and I usually get into the office,
1:19
Speaker 2: you know, Tucker and I usually get in around the
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Speaker 2: same time, maybe six thirty, six forty five, and you know,
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Speaker 2: I was kind of looking around and I'm like, okay,
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Speaker 2: pretty quiet week. Not too much like there's you know,
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Speaker 2: a couple like very meth reports that are going to
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Speaker 2: be coming out today for you know, some economic data.
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Speaker 2: There's nothing huge in terms of earnings. Okay, we could
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Speaker 2: talk about Low's. We already did a home depot this week. YadA, YadA, Okay, yeh.
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Speaker 2: Bond market's been selling off. You know, you're kind of
1:47
Speaker 2: going through like your your checklist, and you're like, what
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Speaker 2: are we gonna you know, is there anything important that's
1:53
Speaker 2: going on? And I was, you know, not scraping the
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Speaker 2: bottom of the barrel, but I was like, I'm just
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Speaker 2: not sure there's like something huge. And then at eight
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Speaker 2: thirty this morning, we got something fun and it corresponds
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Speaker 2: with what Tucker had put on the top of our stack.
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Speaker 2: The top two stack pieces are number one from Wall
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Speaker 2: Street Journal. Bonds are getting hammered. They've been having too
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Speaker 2: much beer. That's not actually the full one. It's bonds
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Speaker 2: are getting hammered in. Wall Street says the route won't
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Speaker 2: end anytime soon. And the second one is America's growing
2:25
Speaker 2: debt pile will be the big focus Wednesday is global
2:28
Speaker 2: bond route deepens, and so like this is a story
2:32
Speaker 2: we've been covering for the last couple of weeks. Like,
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Speaker 2: yields not just in the United States, but across the
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Speaker 2: world have been moving up because nominal growth is good
2:43
Speaker 2: and there's the potential for higher inflation for longer, and
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Speaker 2: so investors around the world. This is not a US phenomenon.
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Speaker 2: It's not like investors being like, ugh, we hate the
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Speaker 2: US dollar. No, it's not that they've been doing it
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Speaker 2: to You look in the UK at what's going on
2:58
Speaker 2: with gilts, You look at Japan with Japanese government bonds.
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Speaker 2: Across the board, bonds have been getting sold off basically
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Speaker 2: except for China, because the Chinese economy is just so
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Speaker 2: futrid right now that investors are like, sure, we'll take
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Speaker 2: anything just to you know, cling to some kind of
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Speaker 2: safety if we need to hold the wan. So we're
3:17
Speaker 2: gonna talk about like this bond route that's happening. And
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Speaker 2: then at eight thirty this morning, the US Treasury, which
3:23
Speaker 2: is run by Scott Bessant, puts out a three three
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Speaker 2: paragraph piece its titled Treasury announces increased size of nominal
3:32
Speaker 2: long end liquidity support buybacks beginning September ninth, and I'm
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Speaker 2: gonna read the whole thing to you, because again it's
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Speaker 2: it's three really short paragraphs. The US Department of the
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Speaker 2: Treasury is increasing by at least double the size of
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Speaker 2: liquidity support buyback operations for longer dated nominal coupon securities
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Speaker 2: the ten year to twenty year sector and twenty year
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Speaker 2: to thirty year sector. The current maximum size of two
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Speaker 2: billion dollars per operation will be at least four billion
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Speaker 2: per operation. This change is effective effective September ninth, twenty
4:00
Speaker 2: twenty six, and will be in effect for the remainder
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Speaker 2: of this refunding quarter through November fourth. Treasury will provide
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Speaker 2: more information about future buyback size that the next quarterly
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Speaker 2: refunding schedule for November fourth. This increasing buyback operation size
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Speaker 2: reflects treasuries desire to provide greater liquidity support in longer
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Speaker 2: dated nominal sectors where there is consistent strong sponsorship for
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Speaker 2: market participants and evidence that includes the significant volume of
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Speaker 2: high quality offers Treasury routinely receives in longer dated buyback operations.
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Speaker 2: So that's what they said. So here, here's what it
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Speaker 2: actually means. The Treasury, in the normal course of business,
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Speaker 2: engages in buying back some longer term treasuries on a
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Speaker 2: regular basis. Provide some liquidity, you know, provide a little
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Speaker 2: bit of additional support in those areas. Fine, they're doubling
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Speaker 2: the size of it. Why is this notable? First of all,
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Speaker 2: four billion dollars per operation? Is nothing, it's it's it's
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Speaker 2: EQUI to mark you ever seen an elephant, like uh,
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Speaker 2: an elephant in person? Yeah? Or or in a or
5:09
Speaker 2: in a book, either one.
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Speaker 3: I believe I'm familiar with the general artistic.
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Speaker 2: Elephant's big, right, big big animal. Yeah.
5:18
Speaker 3: I didn't think this would be my contribution to today's program,
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Speaker 3: but yes, I can. I can confirm elephants are large.
5:23
Speaker 3: What's largest land mammal?
5:25
Speaker 2: What's your least favorite insect?
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Speaker 3: The earwigs They've got the little pincers on the end.
5:32
Speaker 3: And people know what I'm talking about. They seek out
5:34
Speaker 3: humidity and ye, or maybe it's dryness.
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Speaker 2: Yep, what happens when an earwig runs into an elephant?
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Speaker 2: You get squashed? Okay, because it's it's a little tiny
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Speaker 2: it's crawling along the ground and the elephant just steps
5:46
Speaker 2: on it with that big are.
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Speaker 3: In those climates. But yeah, I suppose hypothetical.
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Speaker 2: If if they were I mean, listen, there's elephants in
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Speaker 2: captivity in the US. So if if a captive elephants.
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Speaker 3: To an elephant pen yeah, I see what you're getting.
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Speaker 2: Yeah, which happens all And I'm sure this is basically
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Speaker 2: what's happening with this Treasury operation. It's it's this earwig
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Speaker 2: sized thing that that's not meaningful. What is meaningful is
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Speaker 2: the signal, and the signal is, hey, that the Treasury
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Speaker 2: doesn't like the way the long end of the yield
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Speaker 2: curve has been moving. And so this is basically best
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Speaker 2: and saying I'm not gonna let the long end get
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Speaker 2: away from us the way that it's been getting away
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Speaker 2: from us. The way that they do this is mechanically, Okay,
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Speaker 2: you go and buy back these long term treasuries and
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Speaker 2: you finance it through issuing more short term debt. It's
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Speaker 2: like you can't make the money just like you're not
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Speaker 2: using like fake money. It's just okay, I've got to
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Speaker 2: borrow short term in order to buy long term. Like
6:42
Speaker 2: that's that's what they're doing here. So is this good, bad,
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Speaker 2: or ugly on its face? It's it's neither. It's it's neutral.
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Speaker 2: It doesn't really do anything to affect the broader picture.
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Speaker 2: But here's the signal that it sends again, it's it's
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Speaker 2: this idea that Besson doesn't want the long end to
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Speaker 2: get away. The long end has been running away from
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Speaker 2: all of these different governments over the last few years
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Speaker 2: for various different reasons. Again like you take your pick,
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Speaker 2: like choose why. But this is very much Treasury saying
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Speaker 2: we don't want this to happen anymore. And so in
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Speaker 2: doing that without addressing any of the underlying reasons why
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Speaker 2: investors are demanding more yield. It's it's slapping a band
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Speaker 2: aid on a bullet wound. It's it's not addressing the
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Speaker 2: root cause in any way, shape or form.
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Speaker 3: Am I not understand there is this like swapping short
7:33
Speaker 3: term for long term deck Can we think about it? It's
7:35
Speaker 3: not a swap financially.
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Speaker 2: And this is very much two things. It's three things. Actually.
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Speaker 2: Number One, it's what Janet Yellen did a whole lot
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Speaker 2: of back in Uh but.
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Speaker 3: That was an issuance thing though. She just said, we're
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Speaker 3: going to issue more on the short end. I guess
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Speaker 3: it's it's.
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Speaker 2: No, I'm talking about yelling at the Fed. I'm talking
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Speaker 2: yelling at the Fed.
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Speaker 3: Oh well, yeah, except they can print money.
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Speaker 2: But but but just hear me out on this. This
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Speaker 2: is very much with Janet Yellen in effect. I guess
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Speaker 2: what Yellen was doing at the Fed was saying, hey, look,
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Speaker 2: we are going to buy more on the long end
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Speaker 2: in order to try to keep yields down and juice
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Speaker 2: growth back when gross was really bad in the twenty tens.
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Speaker 2: Number Two, it also is what Scott Besson said, Hey,
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Speaker 2: when Jenet Yellen then moved to Treasury in the Biden administration,
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Speaker 2: It's what Besson said, Hey, I don't like that you're
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Speaker 2: doing this like you're manipulating the yield curve and you're
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Speaker 2: making things look one way when they're really not. And
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Speaker 2: now Beson's engaging in the exact same behavior.
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Speaker 3: Yeah. The thing is it doesn't save you money.
8:34
Speaker 4: No.
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Speaker 3: The interest rate, which you could read on Fiscal Data
8:37
Speaker 3: dot Gov which is a fantastic adjunct to the Treasury's website.
8:41
Speaker 3: The interest rate on Treasury bills shortest term stuff three
8:45
Speaker 3: point seventy six interest rate on t This is the
8:47
Speaker 3: average rate on the most recent auction, and the interest
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Speaker 3: rate on bonds is three point four to four, so
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Speaker 3: you're effectively paying thirty basis points more.
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Speaker 2: Right, it does whatever, It doesn't see any.
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Speaker 3: On the long run. It could arguably not much chuck,
9:03
Speaker 3: but it exacerbates the structural problem, which is deficits and.
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Speaker 2: Debt, and doesn't it Yes, yes, okay, it does start.
9:12
Speaker 3: Sorry, I want to make sure on.
9:13
Speaker 2: What the what the US government? And the third thing
9:15
Speaker 2: it does, okay, it basically mimics what a lot of
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Speaker 2: emerging markets have to do in order to finance their
9:22
Speaker 2: debt because no one wants to buy long term debt there,
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Speaker 2: and so they start rolling more and more into short
9:26
Speaker 2: term markets and it becomes problematic there. So what you
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Speaker 2: have is a response to this. Here's what's going on.
9:33
Speaker 2: The dollars getting whacked today down three quarters of a
9:35
Speaker 2: percent gold as you would expect. Hey, if you're not
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Speaker 2: addressing the underlying causes of higher bond yields, but instead
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Speaker 2: just trying to tamp them down. What do investors do, Hey,
9:46
Speaker 2: I want to own hard assets. Because you're not gonna,
9:48
Speaker 2: you know, give me a real rate of interest that
9:51
Speaker 2: I'm demanding on long term bonds. Great, I'm gonna go
9:54
Speaker 2: and buy an asset that's gonna have a long term return.
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Speaker 2: Commiserate with one what I deserve. And so investor are
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Speaker 2: buying gold. Gold's up two and a quarter percent today.
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Speaker 2: EM stocks are ripping today in response to this because
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Speaker 2: dollar down, Good for em You can you know, pay
10:09
Speaker 2: back those dollar loans more cheaply. Great. So you've got
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Speaker 2: this going on here. And I think the big thing
10:17
Speaker 2: is is something that we've talked about for a while,
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Speaker 2: which is the structural drivers of these higher yields worldwide.
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Speaker 2: No one's addressing them, actually, and so what you'll expect
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Speaker 2: to see, my guess, is that one by one other
10:31
Speaker 2: countries try to fall in line with this. And pretty
10:33
Speaker 2: much what they do is these are this is countries saying, hey,
10:37
Speaker 2: we want to save our bond market at the expense
10:41
Speaker 2: of our currency.
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Speaker 3: They can free ride because US yields will pull down.
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Speaker 2: In the short term. They can.
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Speaker 3: This is only short term. This doesn't work in the long.
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Speaker 2: Well, that's what I'm saying. Yes, so they can free
10:50
Speaker 2: ride in the short term.
10:51
Speaker 3: Yeah, no, they don't have to do a thing. And again,
10:53
Speaker 3: penny wise, pound foolish, or maybe optically it makes sense.
10:57
Speaker 3: It is bringing down the long end. I can't deny that,
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Speaker 3: But fiscally this does not to me, and I may
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Speaker 3: be missing something. Make a lot of sense. And also
11:06
Speaker 3: you can't ignore the timing here. There's an election two
11:08
Speaker 3: months from now. The president is desperate to get longer
11:11
Speaker 3: term interest rates go down. Everything is going in the
11:14
Speaker 3: wrong direction pretty much economically right now, in terms of
11:18
Speaker 3: rate of in terms of direction of change change rates GDP. Yeah,
11:22
Speaker 3: I'm not going to get into all that, but desperate
11:25
Speaker 3: for a win. Lower interest rates mortgage rates specifically would
11:28
Speaker 3: be a win. But longer term this makes the fiscal
11:32
Speaker 3: situation more precarious, does it not? If I'm understanding correctly,
11:38
Speaker 3: what is happening, probably swapping long term and this long
11:41
Speaker 3: term debt, by the way, was issued it historically very
11:43
Speaker 3: low rates. This is the type of debt like if
11:45
Speaker 3: you've got a mortgage at two percent, you can relate
11:47
Speaker 3: to this. You're keeping that mortgage. Correct, We financed we
11:50
Speaker 3: funded that long term debt at very very low rates.
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Speaker 3: Very smart to issue debt when long term rates were low.
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Speaker 3: This swaps your two percent mortgage to continue with the
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Speaker 3: analogy for a higher interest rate, more brigage, now, does
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Speaker 3: it not? Yes, because short term rates have not been
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Speaker 3: higher for a very long time and we're assuming more.
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Speaker 3: We're swapping again, not in the financial sense of the term,
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Speaker 3: just in the common usage sense of the term.
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Speaker 2: The other piece that I'll put out there is and
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Speaker 2: this is a question again, we're gonna we're gonna talk
12:16
Speaker 2: about this next segment as well. Kevin Worsh just came
12:20
Speaker 2: on board at the FED three months ago. Yeah, three
12:24
Speaker 2: months ago. Mark, if you had to like look at
12:28
Speaker 2: like the one general principle that Worsh is pushing for
12:32
Speaker 2: at the FED, what would you say that it is?
12:36
Speaker 3: Like what is his what is his north star?
12:38
Speaker 2: I'll put mine out. It is a less interventionist FED
12:41
Speaker 2: policy that makes the forces markets to absorb data.
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Speaker 3: It's not trying to lead the bond market around by
12:48
Speaker 3: the nose.
12:48
Speaker 2: Yes. So there's two possibilities here. Number One, Kevin Worsh
12:52
Speaker 2: was caught off guard by what the Treasury's doing again,
12:54
Speaker 2: like they're not supposed to coordinate everything they do. It's
12:57
Speaker 2: just not how they operate. But this is kind of
13:00
Speaker 2: a big shift. So Number one, Kevin wars is caught
13:03
Speaker 2: off guard by this consult He was consulted and said, yeah,
13:07
Speaker 2: go ahead with it, which means, okay, it's the new
13:10
Speaker 2: boss is the same as the old boss in terms
13:12
Speaker 2: of worsh basically being the same as either Powell or Yelling,
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Speaker 2: in which case, thanks for playing guys, but we're not
13:20
Speaker 2: really doing anything.
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Speaker 3: I thought about that angle.
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Speaker 2: Let's take a quick break. When we come back. I
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Speaker 2: want to talk more about this and what it means next.
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14:00
Speaker 2: I want to talk more about what's going on in
14:03
Speaker 2: in the bond market here, just because this is meaningful.
14:07
Speaker 2: So again, the US Treasury, in case you missed the announcement,
14:11
Speaker 2: is doubling the size of their long term treasury buybacks,
14:16
Speaker 2: being able to buy back ten to thirty year bonds
14:18
Speaker 2: and higher numbers. Not higher enough numbers to actually make
14:21
Speaker 2: a difference in the market, but basically a signal saying, hey,
14:24
Speaker 2: if yields get this high again, we're going to keep,
14:26
Speaker 2: you know, putting pressure on them to come down.
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Speaker 3: Yes, well, okay, for as long as they can't. What
14:31
Speaker 3: are they They don't have an unlimited reservoir to draw
14:34
Speaker 3: upon here like they're doing this again. Just so I
14:38
Speaker 3: understand the mechanics by issuing short term excuse me by
14:40
Speaker 3: by swapping, if you will, short term debt for long
14:42
Speaker 3: term debt.
14:43
Speaker 2: Right, yes, So it doesn't change treasury builds, doesn't change
14:45
Speaker 2: the amount of depth that's outstanding in any way shape.
14:48
Speaker 3: Or Treasury can't print money. This is not like what
14:50
Speaker 3: the Fed did. They don't again, an unlimited supply to
14:54
Speaker 3: do this with.
14:55
Speaker 2: So in looking at this, I think the interesting question
14:58
Speaker 2: is going to be how does the market push back
15:02
Speaker 2: on this, or does the market push back on this
15:04
Speaker 2: in the coming weeks. The example that I'll compare it
15:07
Speaker 2: to a couple of weeks ago we had the Japanese
15:10
Speaker 2: and US intervention in the en to try to push
15:13
Speaker 2: it down from you know, one hundred and sixty three
15:15
Speaker 2: hundred and sixty four a dollar. It got it down
15:19
Speaker 2: to one fifty seven, and then by the end of
15:23
Speaker 2: last week or early this week, get it pop back
15:25
Speaker 2: up to one fifty nine. And so it's kind of
15:28
Speaker 2: like trying to keep a beach ball underwater water where
15:30
Speaker 2: it's you know, like you're pushing it down. You're pushing
15:33
Speaker 2: it down, and the further down you push it, the
15:35
Speaker 2: more pressure it's you know, it has coming back up.
15:38
Speaker 2: So I think the question on this is going to
15:41
Speaker 2: be does the bond market push back at some point
15:45
Speaker 2: or does the bond market say, you know what, not
15:48
Speaker 2: gonna fight the Treasury, not gonna fight the Fed. We're
15:50
Speaker 2: gonna you know, if that's what they're gonna do. Fine,
15:54
Speaker 2: We're not gonna do anything on the treasury side of things,
15:59
Speaker 2: but you know what, we're going to take a look
16:02
Speaker 2: at the rest of the bond market there. And the
16:05
Speaker 2: piece that I wonder about then is, Okay, what does
16:07
Speaker 2: this do for And there are two ways to look
16:09
Speaker 2: at it. For spreads, for like corporates, if inflation is
16:13
Speaker 2: still going to be higher, nominal growth is going to
16:15
Speaker 2: be hired, there's two ways to look at this. Number One, Okay,
16:18
Speaker 2: if you're borrowing as a corporate borrower, does the market
16:22
Speaker 2: demand to hire interest rate from you?
16:24
Speaker 3: Possibly why they're pushing it? Just preasures are a part
16:29
Speaker 3: of the building. Is are one block in the.
16:31
Speaker 2: They are, but it might just be Look, I'm not
16:33
Speaker 2: going to fight the treasury, but I will fight.
16:36
Speaker 3: Why not just the others? The short end of the
16:38
Speaker 3: treasure you curve.
16:39
Speaker 2: So here's the well, you can't punish the short end.
16:42
Speaker 2: What are you gonna do the short end of the
16:43
Speaker 2: treasurey yield curve?
16:46
Speaker 3: There's plenty of shorter term treasures are up today.
16:51
Speaker 2: Uh you're talking like very very short. I mean you're
16:54
Speaker 2: up one basis point, so like you know, you're not
16:57
Speaker 2: really the other piece. The other way you can look
17:00
Speaker 2: at this is, okay, if you're going to allow higher
17:03
Speaker 2: nominal growth and higher inflation, potentially, well the odds of
17:08
Speaker 2: corporate borrowers defaulting it's lower in that in that event, higher.
17:12
Speaker 3: Reflection is only possible if monetary policy is complicit in this,
17:15
Speaker 3: and we don't yet know that.
17:16
Speaker 2: Worsh Mark Mark Mark.
17:20
Speaker 3: Let's I can't believe this, Kevin Warshow I can't believe
17:22
Speaker 3: you would do this to.
17:23
Speaker 2: Us, mar Mark, Let's be serious here. Let's be serious
17:27
Speaker 2: here for a minute.
17:27
Speaker 3: All right, I'll try.
17:29
Speaker 2: Do you think what the Treasury is doing today is
17:32
Speaker 2: going to be counteracted by Warsh suddenly being hawkish and saying, yes,
17:37
Speaker 2: let's just start raising rates. Willy nilly?
17:40
Speaker 3: Does it give you more roomed? If this this will
17:42
Speaker 3: have a half life of like two days. So this
17:45
Speaker 3: is not sustainable, this bump in long term treasury prices
17:49
Speaker 3: that we're seeing today, But it might give worsh more
17:51
Speaker 3: room to raise if the long end is coming down,
17:54
Speaker 3: if the market is really worried that the tread that
17:57
Speaker 3: descent could jump in at any time and kill their
18:00
Speaker 3: short positions or whatever. It keeps everybody from expressing their
18:04
Speaker 3: real views.
18:06
Speaker 2: But then it also means that there is no It
18:09
Speaker 2: also means that Fed policy effectively is newtered by this.
18:13
Speaker 2: Like no matter what worst does, it doesn't have any
18:15
Speaker 2: effect on the market.
18:16
Speaker 3: I Fed controls short term, not in theory exactly long
18:19
Speaker 3: term rates.
18:20
Speaker 2: Well, the FED controls short term in order to influence
18:22
Speaker 2: longer term rates. The whole companies don't borrow short term
18:26
Speaker 2: like you when you look at the like for big
18:29
Speaker 2: kapex projects or for the housing market papers. No, but
18:34
Speaker 2: but but think about the stuff that actually influences the economy.
18:38
Speaker 2: It's long term borrowing, it's housing, and it's big kapex projects,
18:42
Speaker 2: none of which are financed by like one year loans.
18:45
Speaker 2: It's all ten to thirty year loans. If if wars
18:49
Speaker 2: are just pushing on a string raising short term rates
18:52
Speaker 2: while the Fed keep while the Treasury keeps the long
18:54
Speaker 2: end down, it's not going to slow the economy.
18:59
Speaker 3: But long term are just a sequence of shorter term
19:01
Speaker 3: rates plus a risk premium. This could easily backfire.
19:04
Speaker 2: But this is what I'm saying, is it will because
19:08
Speaker 2: you won't end up with a slowing like the Fed
19:10
Speaker 2: monetary policy will cease to be effective. Is my point.
19:14
Speaker 2: You can't slow the economy by raising rates. Then if
19:16
Speaker 2: the long end isn't allowed to float, but we know, sorry, good, no,
19:22
Speaker 2: that's I'm not sure about that.
19:25
Speaker 3: Then we could pick this up at eleven.
19:26
Speaker 2: We'll pick it up in a little bit quick break
19:28
Speaker 2: here Tom Lotski's next.
19:38
Speaker 1: Like us on Facebook and follow us on Twitter at
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19:46
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19:50
Speaker 1: Wall Street Watch tracking the stocks, the data, and the
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19:59
Speaker 5: Markets trading mars higher after the Treasury set it would
20:02
Speaker 5: at least double the amount of bonds it buys back
20:05
Speaker 5: earlier this morning. This comes after the thirty year treasure
20:08
Speaker 5: Reeled hit its highest level in nineteen years. Right now,
20:11
Speaker 5: the Dow is up half a percent, or two hundred
20:13
Speaker 5: and eighty five points higher, SMP five hundred up over
20:16
Speaker 5: a third of a percent or twenty eight points higher,
20:18
Speaker 5: Nasdaq dipping only by eight points, Russell two thousands up
20:22
Speaker 5: two thirds of a percent.
20:23
Speaker 2: It's in your treasure reel.
20:24
Speaker 5: Down six basis points at four point six four five percent,
20:29
Speaker 5: and oil is up about one percent higher, trading right
20:32
Speaker 5: around eighty five dollars a barrel. Some major news from
20:36
Speaker 5: Maderna and Merk this morning, after the biotech firm's collaborative
20:39
Speaker 5: experimental vaccine succeeded in preventing cancer from coming back or
20:44
Speaker 5: spreading in a study of high risk melanoma patients. Moderner
20:48
Speaker 5: stock is soaring on that news. Over two more retailer
20:53
Speaker 5: earnings where Target provided evidence that its turnaround is making
20:57
Speaker 5: progress after the company beats second quarter earnings where it's
20:59
Speaker 5: compared RBLE sales grew three point eight percent, that stock
21:03
Speaker 5: up by four percent.
21:04
Speaker 2: Lows also up four.
21:05
Speaker 5: Percent, despite the retail reporting mixed quarterly results as it
21:09
Speaker 5: continued to see pressure in home improvement spending, and chip
21:13
Speaker 5: maker Marvel Technology jumping over seven percent higher after it
21:17
Speaker 5: announced it was given Google permission to buy a twelve
21:21
Speaker 5: billion dollar steak in the company as part of a
21:23
Speaker 5: deal to develop custom chips for Google. I'm Tucker Silva
21:28
Speaker 5: and that is Wall Street Watch.
21:31
Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
21:35
Speaker 1: If you have an existing estate plan or in the
21:37
Speaker 1: market for one, Todd Lutsky is here to answer your
21:39
Speaker 1: questions and help you plan for a later life. Ask
21:42
Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
21:45
Speaker 1: New England for more than thirty five years, helping families
21:48
Speaker 1: with a state and tax planning, Medicaid planning, and probate law.
21:52
Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
21:58
Speaker 2: As promise, We're now joined by no. One and only
22:01
Speaker 2: Todd Lutsky from the law firm of cushionon Dolan. We
22:05
Speaker 2: got the phone lines wide open at eight eight eight
22:08
Speaker 2: to zero five two two sixty three. That is the
22:11
Speaker 2: number to call ask Todd your estate planning questions live
22:15
Speaker 2: on air right now eight eight eight two zero five
22:20
Speaker 2: two two six three. Again, we can usually get through
22:23
Speaker 2: maybe two or three year calls, so good call on
22:25
Speaker 2: early to make sure we uh to make sure that
22:28
Speaker 2: you have the opportunity, uh to speak with Todd now
22:31
Speaker 2: eight eight eight to zero five two two six three.
22:34
Speaker 2: Mister Lutsky, how are you doing today? I am never
22:37
Speaker 2: better and and and you I'm doing pretty well. I
22:40
Speaker 2: uh was chatting with my wife over the weekend. You
22:44
Speaker 2: guys talk we do, and I kind of your department.
22:49
Speaker 2: I told her that I wanted to be cremated. Yeah, okay,
22:53
Speaker 2: she made an appointment for Thursday. That's good. Yeah, it's uh,
22:58
Speaker 2: you know, not quite my schedule, but hey, going with
23:00
Speaker 2: the flow, Todd. Want to talk a little bit about
23:05
Speaker 2: different estate planning tools and kind of how they interact
23:08
Speaker 2: with the various goals that people may have. Okay, major
23:12
Speaker 2: goal for a lot of folks, Hey help you know,
23:15
Speaker 2: reduce any potential pain from the cost of long term care. Yeah,
23:21
Speaker 2: another major goal for folks manage estate taxes? How do
23:27
Speaker 2: the various instruments work to accomplish both of these goals,
23:32
Speaker 2: not just one?
23:33
Speaker 6: So that does make it a little harder, right, because
23:37
Speaker 6: when you're talking about estate taxes and medicaid planning, the
23:42
Speaker 6: first thing we need to realize is they are mutually exclusive.
23:47
Speaker 2: And the rules governing.
23:49
Speaker 6: Irs estate taxes are entirely different than the rules governing
23:55
Speaker 6: medicaid planning.
23:57
Speaker 2: So to work together, can you? Yeah?
24:00
Speaker 6: And the really the only tool I guess that makes
24:04
Speaker 6: it a little easier to really do both would be
24:08
Speaker 6: an irrevocable Medicaid trust. I really don't know of any
24:10
Speaker 6: other kind. So this trust, although it's irrevocable, is designed
24:16
Speaker 6: to do both right, And so that's what's important. So
24:19
Speaker 6: let's just take an example. If you have an individual,
24:22
Speaker 6: Let's say I'm a married couple that has say three
24:27
Speaker 6: million dollars of assets, Sure, and we want to protect
24:31
Speaker 6: them from probate. Of course, we want to avoid taxes,
24:34
Speaker 6: as you said, And again with three million dollars, we're
24:36
Speaker 6: not really worried about the federal number, but we are
24:39
Speaker 6: in mess, right, Mass is a two million dollar exemption,
24:42
Speaker 6: and it's basically a freebie. If you don't do planning,
24:45
Speaker 6: you're going to pay tax on the amount over the
24:47
Speaker 6: two So it's a million bucks.
24:49
Speaker 2: That's not the tax, but you'll pay the tax on
24:51
Speaker 2: a million.
24:53
Speaker 6: Or if you are married and you do a trust,
24:56
Speaker 6: then you can double that exemption of two million, one
25:00
Speaker 6: for each person, because we all have this exemption, and
25:04
Speaker 6: so we need to trust though in order to double it,
25:06
Speaker 6: because the trust shelters assets from taxation on the first death.
25:12
Speaker 6: In other words, they use up some of the exemption
25:16
Speaker 6: on the first death, preventing what's in that decendans trust
25:20
Speaker 6: from being taxed again when the surviving spouse dies, and
25:25
Speaker 6: that's the key. You got to shelter some of those away.
25:27
Speaker 6: Doesn't mean that surviving spouse can't continue to use what's
25:31
Speaker 6: in the deceased spouse's trust, but it would not cause
25:35
Speaker 6: it to be includable in the surviving spouse's estate. So
25:40
Speaker 6: the trust is what focuses on the estate tax side,
25:44
Speaker 6: and that's where that marital share and remainder share come in.
25:47
Speaker 6: When one spouse dies, now with three million dollars, you're
25:50
Speaker 6: going to need two trusts, one for husband, one for wife,
25:53
Speaker 6: simply because we don't know who's going to die first,
25:55
Speaker 6: and we want to make sure we shelter those assets. Now,
25:59
Speaker 6: it's it's the type of trust that adds the medicaid
26:03
Speaker 6: protecting piece. If you had done this and it was
26:07
Speaker 6: a revocable trust, you would still avoid taxes and probate
26:10
Speaker 6: and bloodline planning, all that would work, but you would
26:14
Speaker 6: have no no nursing home protection. So to add both,
26:17
Speaker 6: you need to do this irrevocable trust. And now that
26:21
Speaker 6: trust has language in it that provides protection and most importantly,
26:26
Speaker 6: has the language that starts that five year waiting period
26:30
Speaker 6: running on the day you fund the trust, whereas that
26:33
Speaker 6: would never run if you funded it in a revocable trust.
26:37
Speaker 6: So there's your there's your answer.
26:39
Speaker 2: Talking with Todd Lutsky from the law firm of Cushing
26:42
Speaker 2: and Dolan, we do still have room on the phone
26:44
Speaker 2: lines for your estate planning questions at eight eight eight
26:48
Speaker 2: to zero five two two six three. That phone number
26:51
Speaker 2: again is eight eight eight two zero five two two
26:55
Speaker 2: sixty three. We're gonna take a quick break here, but
26:58
Speaker 2: when we return, we're gonna get right to your questions
27:01
Speaker 2: with Todd eight eight eight to zero five two two
27:05
Speaker 2: sixty three one more time. That phone number is eight
27:08
Speaker 2: eight eight to zero five two two sixty three.
27:12
Speaker 1: Ask Todd with Todd Letsky every Wednesday at ten thirty
27:16
Speaker 1: only here on the Financial Exchange Radio Network. Todd Letsky
27:21
Speaker 1: answers your questions about a state and elder life planning
27:24
Speaker 1: every Wednesday at ten thirty, right here on the Financial
27:27
Speaker 1: Exchange Radio Network.
27:38
Speaker 2: All right, mister, let's give We got some calls qued
27:40
Speaker 2: up for you here. Let's go to fill on the cave. Phil,
27:42
Speaker 2: what's your question for Todd Lutsky?
27:45
Speaker 1: Uh?
27:46
Speaker 2: Todd?
27:46
Speaker 4: Eight years ago you did to trust one for my
27:49
Speaker 4: wife and one for myself and my uh, and since
27:53
Speaker 4: then multiple rental incomes have been coming into the trust.
27:57
Speaker 1: Great.
27:58
Speaker 4: My question is do I have access to any of
28:01
Speaker 4: the money in my trust with the rental income produced?
28:06
Speaker 2: Is?
28:06
Speaker 3: Oh?
28:07
Speaker 6: Absolutely?
28:08
Speaker 5: So?
28:08
Speaker 6: Just remind me of a couple of things, Phil. One,
28:12
Speaker 6: the trust we did for you and your wife, were
28:14
Speaker 6: they irrevocable or revocable?
28:17
Speaker 7: Irrevocable?
28:18
Speaker 6: Wonderful?
28:19
Speaker 2: So?
28:20
Speaker 6: So again the good news is, and how many rental
28:22
Speaker 6: properties are in these trusts?
28:26
Speaker 4: Four?
28:27
Speaker 6: Four? And are they split between your trust and your
28:29
Speaker 6: wife's trust? Right?
28:32
Speaker 2: Okay?
28:33
Speaker 6: So I assume you've been opening up bank accounts for
28:36
Speaker 6: these trusts. We would have got you an ID number,
28:38
Speaker 6: we would have moved the real estate in there, and
28:40
Speaker 6: you've been depositing the rent checks into these respective trusts
28:45
Speaker 6: as the rent comes in correct.
28:47
Speaker 4: That is correct without touching any of the income.
28:51
Speaker 2: So here's the.
28:54
Speaker 6: Answer, and I lay this out so that your question
28:56
Speaker 6: can help a lot of other people as well. That's
28:59
Speaker 6: why I'm laying out these additional facts. So life goes
29:02
Speaker 6: on for you, and it's actually you've been restricting yourself
29:05
Speaker 6: way more than you ever needed to. So the bottom
29:08
Speaker 6: line is that life would really be completely unrestricted for
29:11
Speaker 6: you even though we have this irrevocable trust. So a
29:13
Speaker 6: couple things. One, the trust says all income belongs to you,
29:21
Speaker 6: phil Or in your wife's trust, all income belongs to her.
29:24
Speaker 6: So you and your wife are entitled to all the
29:27
Speaker 6: income from the trust, and you can take it directly
29:30
Speaker 6: from the trust into your personal bank account where you
29:33
Speaker 6: collect say your social Security, your pension, etc. So normally
29:38
Speaker 6: what I tell clients, and I probably told you, is
29:40
Speaker 6: that you set up the account with the in the trust,
29:44
Speaker 6: and you can set the account up as an automatic
29:46
Speaker 6: transfer what that means is every time you deposit the
29:50
Speaker 6: rent check into that trust bank account, that trust bank
29:54
Speaker 6: account automatically kicks the money out into your personal income,
29:58
Speaker 6: your personal bank account, so that you're getting this income, okay,
30:02
Speaker 6: and you can use this income for whatever you want.
30:04
Speaker 6: Maintain the buildings, go out to dinner, buy a car, whatever, however.
30:07
Speaker 6: You use your income to supplement your Social Security pension,
30:12
Speaker 6: et cetera. So that's number one. If you haven't been
30:15
Speaker 6: taking it, go take it. Number two. By the way,
30:18
Speaker 6: the way my trust is designed is that that money
30:21
Speaker 6: doesn't become part of principle. It's an account receivable. So
30:26
Speaker 6: you probably have a lot of income that you could
30:28
Speaker 6: take out if you needed to. I'm not saying you
30:30
Speaker 6: have to, but if you needed to. Now good news
30:34
Speaker 6: about that is not only are you entitled to the income,
30:37
Speaker 6: but the way we do the trust is I assume
30:39
Speaker 6: you've been filing income tax returns for the trust, which
30:42
Speaker 6: are ten forty one grant or income tax trust returns.
30:47
Speaker 6: The beautiful thing about that is that the trust, while
30:50
Speaker 6: filing these returns, pays no tax. It's all picked up
30:55
Speaker 6: on your personal income tax return schedule E. I assume
31:00
Speaker 6: that's where you've been putting the rent, the expenses, the depreciation, etc.
31:06
Speaker 6: So what that means is whether, because it's a grant
31:09
Speaker 6: or trust as to both principal and income, whether you've
31:14
Speaker 6: actually taken the money out or not. When it sounds
31:17
Speaker 6: like you haven't, which is great. You didn't need it.
31:20
Speaker 6: Whether you've taken it or not, it is going to
31:24
Speaker 6: be picked up on your personal income tax return, so
31:27
Speaker 6: you are paying exactly the same amount of income tax
31:30
Speaker 6: that you would have been paying whether you had the
31:33
Speaker 6: trust or not. So that gives you those answers. And yes,
31:37
Speaker 6: you didn't ask it, but I'm gonna tell it for
31:39
Speaker 6: everybody else. You could sell any one of these properties
31:42
Speaker 6: anytime you want to as well, and or use the
31:44
Speaker 6: money to buy another property or invest it as you
31:47
Speaker 6: see fits. So great question, Phil. I hope that answers
31:50
Speaker 6: a lot of your questions. If you need more, please
31:52
Speaker 6: call offline and happy to happy to help. But it
31:56
Speaker 6: sounds like you're in good position with your your stay plan.
32:01
Speaker 6: But you know, folks, never, even though you do your planning,
32:05
Speaker 6: you could still have assets outside the trust, which I'm
32:08
Speaker 6: sure he does that could be at risk if you
32:10
Speaker 6: enter a nursing home. And for folks who haven't done
32:12
Speaker 6: their planning and are faced with entering a nursing home,
32:14
Speaker 6: it's usually a last minute situation. Right you're like, oh
32:17
Speaker 6: my gosh, I'm going to the nursing home. Don't write
32:21
Speaker 6: the check. Get this guide Last Minute Eligibility Planning, and
32:25
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32:29
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32:32
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32:36
Speaker 6: a rental property, a vacation home, life insurance iris. Folks,
32:41
Speaker 6: they're all treated differently if you're married and single, either one.
32:47
Speaker 6: It's laid out in here as to how to do
32:49
Speaker 6: those things to prevent you from writing that check. So
32:52
Speaker 6: little something for everyone planning or not eight six six
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33:02
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33:06
Speaker 6: nine nine or Legal Exchange Show dot com.
33:10
Speaker 2: Todd got another one for you here. Let's go to
33:12
Speaker 2: Peter in Rutland. Peter, you are on with Todd Lutsky.
33:16
Speaker 7: Good morning, Todd, Good morning, how are you. I listened
33:20
Speaker 7: to the show regularly, and I figured i'd give you
33:22
Speaker 7: a call.
33:22
Speaker 6: Well, thanks, Yeah, it's a great show.
33:26
Speaker 7: I've got a meeting with my lawyer. I had a
33:30
Speaker 7: trust set up in twenty twenty one. It was a
33:35
Speaker 7: revocable trust at the time. I have two daughters. They
33:38
Speaker 7: were twenty three in nineteen. I left my brother as
33:44
Speaker 7: the I'm a trustee, but my brother is ultimate trustee
33:48
Speaker 7: and then it goes to his son. There's been a
33:51
Speaker 7: couple of things going on here. My daughter got married
33:54
Speaker 7: last year, and my other daughter is she's involved with
33:58
Speaker 7: a gentleman right now that I think it's going to
34:01
Speaker 7: go somewhere and whatnot. They are not They have beneficiaries
34:06
Speaker 7: of the trust that they are not involved in the trust.
34:08
Speaker 7: And this trust is five years old, and I'm considering
34:12
Speaker 7: doing an irrevocable trust, and I wanted you to comment
34:16
Speaker 7: on as a pitfalls or the possibilities of what could
34:20
Speaker 7: go wrong, because now my daughters are involved with significantly
34:26
Speaker 7: this once married, and I'm basically looking at them getting
34:30
Speaker 7: some good advice from you.
34:31
Speaker 6: So again, I think a quick question would be you
34:34
Speaker 6: have a revocable so there's the reason to switch now
34:37
Speaker 6: to an irrevocable Is not just because your daughters are
34:40
Speaker 6: getting married or involved in some way. I'll address that separately,
34:44
Speaker 6: because that can be changed in your existing trust or
34:48
Speaker 6: added to your new trust. But is the reason you're
34:51
Speaker 6: thinking of switching because you want to protect assets from
34:54
Speaker 6: the cost of long term care.
34:56
Speaker 7: That right now I am I will be sixty six
34:59
Speaker 7: and too much.
35:00
Speaker 2: So that's that's the reason.
35:03
Speaker 7: Okay, that is one of the things I'm looking at
35:06
Speaker 7: because of the assets that I have. Uh, one of
35:10
Speaker 7: the things that I'm I'm fluctuating on is the house
35:13
Speaker 7: that I'm currently owned, the property that I own. It
35:16
Speaker 7: didn't get put into the revocable trust because wow, yeah,
35:20
Speaker 7: it didn't get put in because I was thinking about
35:23
Speaker 7: selling it.
35:24
Speaker 6: Well here, let me let me just try to I
35:25
Speaker 6: don't want to run out of time. So your question
35:27
Speaker 6: is you want to switch because you want to protect
35:29
Speaker 6: assets from the nursing home and you want to take
35:32
Speaker 6: you want to update to take care of your daughters. Correct.
35:35
Speaker 7: That is correct?
35:35
Speaker 2: All right?
35:36
Speaker 6: So bottom line is that one I agree sixty six.
35:39
Speaker 6: Depending on your net worth, it could switching could be
35:43
Speaker 6: a good idea. I don't know your lawyer that you're
35:47
Speaker 6: going to, but please make sure they understand how these
35:50
Speaker 6: irrevocable trusts work, and don't let them tell you that
35:53
Speaker 6: they're you know, not for you, and they're they're you know,
35:56
Speaker 6: provide too much loss of control. You heard Phil just
35:59
Speaker 6: did it, has lost no control over his assets and
36:02
Speaker 6: the last caller. So just hope it's done right and
36:05
Speaker 6: make sure it's a grand tour trust. Now that said,
36:09
Speaker 6: taking care of your daughters, the language in your revocable trust,
36:13
Speaker 6: or the new language you should put in your irrevocable
36:16
Speaker 6: trust should be what we call creditor protection. I want
36:19
Speaker 6: to say divorce proof language right generation skipping a tax
36:23
Speaker 6: planning language. Basically, divide the assets into two buckets equally
36:28
Speaker 6: for your children, if that's your wish, and then these
36:31
Speaker 6: buckets will hold the assets in trust for the benefit
36:34
Speaker 6: of your children and grandchildren. They can't rob Peter to
36:38
Speaker 6: pay Paul, so you don't have to worry about that,
36:40
Speaker 6: and the assets will come out and the trustees, the
36:42
Speaker 6: disinterested trustees, sole discretion.
36:45
Speaker 2: That way, they.
36:47
Speaker 6: Don't own it, and if there's a divorce down the line,
36:49
Speaker 6: after you're gone, they won't lose half the assets and
36:53
Speaker 6: it'll pass a state tax free to grandchildren. I know
36:56
Speaker 6: that's a rush. We're aren't out of time, but I
36:58
Speaker 6: just want to get that into you, so please get
37:00
Speaker 6: make sure that language is in there.
37:02
Speaker 2: Mister Lutski, thank you so much for joining us today.
37:04
Speaker 2: We appreciate it.
37:05
Speaker 6: Always a pleasure.
37:06
Speaker 1: This has been Ask Todd on the Financial Exchange Radio network.
37:10
Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
37:13
Speaker 1: and Dolan, serving Massachusetts and New England for more than
37:15
Speaker 1: thirty years, helping families with the state and tax planning,
37:18
Speaker 1: Medicaid planning, and probate law. Call eight hundred three nine
37:21
Speaker 1: three four thousand and one or visit Cushingdolan dot com.
37:25
Speaker 1: The views expressed in this segment are solely those of
37:27
Speaker 1: Cushing and Dolan. Armstrong Advisory does not provide any legal
37:29
Speaker 1: or tax advice. Please consult with your illegal or tax
37:31
Speaker 1: advisor on such matters. Cushing and Armstrong do not endorse
37:34
Speaker 1: each other and are not affiliated.
37:36
Speaker 2: Still a bunch to come as we head towards hour two.
37:38
Speaker 2: We've got a big update from a company we haven't
37:41
Speaker 2: heard from recently, Moderna with a big one today. Also
37:45
Speaker 2: a couple of earnings from Target and Low's. We'll be
37:48
Speaker 2: talking about millennials and how they feel about their finances.
37:52
Speaker 2: Can they have more avocado toast? Can they have less
37:54
Speaker 2: avocado toast? We'll see just how much toast they're eaten
37:58
Speaker 2: in general. And then also what's going on with diesel.
38:03
Speaker 2: You probably don't fill up with it at the pump
38:05
Speaker 2: unless you accidentally put the wrong pump into your gas tank,
38:08
Speaker 2: which ends badly. But people who do need diesel, truckers,
38:13
Speaker 2: people like that. What are we see in pricing there?
38:16
Speaker 2: We'll discuss in a bit