Written by: Samira Fatehyar
Synopsis
Listen to the podcast here.
I’m a week late, but I think it worked out better this way because of all the unprecedented events we’ve seen happen just within the three weeks. In addition to the global pandemic, the never ending political divide in the US, the increasing income inequality, we now have somewhat a war on Wall Street happening. You may feel down just thinking about all of this. I mean, come on, this is called the Bad Bad News podcast! But I’ve said this time and time again, there are opportunities in every crisis. I truly believe in that. The first step to solving any problem is admitting, or in this case, identifying that there is one. That’s what I’m here for.
I’m super happy to say that we have not one but two interviews in the podcast surrounding big events that have taken over many headlines! The biggest question on a lot of people’s minds is what happened with GameStop? I will be getting into that with financial advisor Mr. Leyder Aiden Murillo. Another big topic that should be on people’s mind is inflation. We’ll be talking to Dr. Mark Pingle about inflation and what we should expect to see. You can view both of these interviews on YouTube on the Bad Bad News Podcast Channel! And for our ever growing European audience, we will be talking about Italy and France and what’s going on there.
Economic Update
Covid-19 stimulus package
In the interest of time, I have decided to not get too into depth with our economic update this time. But, a constant headline in the news is the Covid-19 relief bill. Will anyone be seeing any checks? Will the unemployment benefits continue? Will Republicans and Democrats come to a consensus on the amount for stimulus checks? It’s never ending questions. I don’t know all the answers, but I thought I would at least give an update on the situation.
As far as we know, it will be a 1.9 trillion dollar relief package. The House and the Senate voted on the budget on Friday the 5th, with the tie breaking vote coming from Vice President Kamala Harris. I won’t go into too much depth about the logistics the Democrats are using to pass the relief package but it is through a process known as reconciliation and is expected to last weeks in order to pass. But even then, there isn’t unanimous consensus on some of the amendments even within the Democratic party. This means things will continue to be delayed since our politicians can’t seem to agree on much these days.
The bill has called for many things including $1,400 stimulus checks, expanding pandemic unemployment aid, aid for vaccine distribution, and upgrades to schools and hospitals. Some of the disagreements within the Democratic party include raising the federal minimum wage to $15 an hour, tying unemployment benefits to the average national unemployment rate, and forgiving some student loan debt.
Graph 1
Total US Employees on Nonfarm Payrolls, 2015 to present
https://www.bloomberg.com/news/articles/2021-02-05/biden-s-go-big-push-on-stimulus-gets-help-from-weak-jobs-senate?sref=jbVt2saA
Unfortunately the unemployment situation has started to slide again. My hope is that our politicians can do what’s best for the country and truly help those of us that are hurting the most. The pandemic has exacerbated already growing problems in our economy. As of right now, pandemic unemployment aid is set to expire by March 14th. Let’s hope that they can find a way to speed up the vaccination process and help stop the financial bleeding people are going through!
Over this past weekend, Treasury Secretary Yellen stated that if the $1.9 trillion Covid-19 relief package passes, she expects to see full employment by next year. I think this is widely optimistic as the virus is still not under control. Sure, we will be speeding up vaccinations, but as of right now there is a shortage, even if that does get addressed, we have a virus that is mutating and one that we still don’t truly understand. I would err on the side of caution here with this prediction. Though I hope we can get back to full employment, it will take some time.
The GameStop Debacle
The Gamestop debacle
A Conversation with Mr. Leyder “Aiden” Murillo
For those of you familiar with this blog, you have heard from Mr. Leyder “Aiden” Murillo before. In any case, I’d like to still give him a formal introduction once more. Leyder "Aiden" Murillo is a fee-only fiduciary, independent financial advisor, and managing director of his firm: Wolfpack Investment Management. He brings affordable financial planning and investment management services to young professionals, business owners, educators, and married couples who want to focus on maximizing their financial goals. There are no income or minimum investable asset requirements. He provides clients the solution to regaining their freedom to focus on what they are most passionate about while becoming confident about their financial future by understanding it. He has been in the wealth management industry since 2013. He has worked extensively with a variety of clients from small, medium, and large net worth individuals to large institutional clients. He is a Level II Chartered Financial Analyst (CFA) exam candidate. To listen to the interview, please check out the podcast. To view the video interview click here. The following is a transcript of our conversation.
Samira: Alright, so first off, thank you Aidan for agreeing to come back on the podcast. I know both you and I have received tons of questions regarding the GameStop debacle, so I'm really glad we can share this platform to answer most of the questions we've received.
Aiden: Yeah! I'm glad to be back. Thank you for having me. You know, the last time that I was on your show it was quite a different, you know, experience of what was happening in the real world. So it's totally shifted, so it's good to say that it's good to have something different on our minds now.
Samira: Yeah, I agree. So you know, let's dive right in! You and I have been discussing this whole GameStop thing since it first started and we've questioned each other back and forth on the ethical ramifications of it. But before we can really dissect that, I think we first need to take a moment and explain what happened to, you know, the whole thing and explain it in the simplest way to our audience.
Aiden: Yeah, so where do we start? Because it's one of those things that, it's like one of those advanced topics in investments, but we'll try to see if we can explain it. Because here's the thing, you have an institution out there betting against the market saying it's gonna go down in price, whereas now you have all these retail investors saying no, that's not right, it's gonna go with the market, it's going to increase in price. So how can we explain this? So let me ask you this Samira, what's a material item that you can’t live without?
Samira: My phone.
Aiden: Okay, so let me borrow that from you for the next couple of days because I've done some deep analysis of the company, right? The company that makes this phone. It will either come out with a better phone or it'll, you know, go out of business or they're doing something illegal. And therefore making your phone practically worth $0 and in the end what I can do also is I'll pay you some interest because I'm borrowing it from you. Because you want to be rewarded for it, you know you're lending it so then I go into the market to sell it. This is how I make a premium. And then I wait two days. And you know what? Newer model came out and that phone is practically worthless. So then I use that premium that I originally got. Let's say it was $100. And now I can buy back the phone for $75 and I give you back your phone. I make $25 and then if you add the interest to it that I paid you, $5 let's say, that's a net of $20. Hope it didn't get too confusing there.
Samira: Yeah, I think that's as simple as you can explain it. So what happens if you know your plan didn't go as planned and the value appreciated instead?
Aiden: Yeah, that's a great question. Well, I would be at a loss because let's say I got $100 for it when you lent it to me. Then I had to go back to the market to buy it at let's say, $125. So basically I lost $25. So add $5 interest for that, that's a loss of $30, so you notice how if the value continues to appreciate, it kind of makes a little, you know, puts you in a bind, if you are going against what the market is telling you.
Samira: Right, ok, so what if the price starts to move up too quickly and I call you concerned that I won't be able to get my phone back?
Aiden: Yeah, that's a very good question, so you are concerned because you want this back and you feel like you're not gonna get this back. So I either have to deposit some sort of money in good faith or buy the phone immediately from you at the market price. So essentially what you just did was you gave me a margin call and basically that means hey, you need to either deposit more money or buy the phone from me, or find an equivalent phone and put it in, you know have it with you in your possession, in order for you to feel much more calm. And basically what happened with me is what we call a short squeeze because I'm being squeezed out of earning a profit because now the price is moving up way too quickly and therefore I need to either scramble to find this product you know at a much more expensive price against me. You know, and I'm losing profits on that type of a a strategy trade, so hopefully it made a little sense. But that is as basic as we can try to explain it, but it's a little bit more complex and you know it if they if you want to do a deep dive, I'd be more than happy to explain that in my video that's coming out.
Samira: Yeah, no, I think that was great and as basic as we can go trying to explain what it all meant you know and I really appreciate that. So now that we understand the basics, let's have you explain what happened with the Reddit users and the hedge funds that were shorting GameStop at the time. And let's clarify why they shorted it and who the hedge funds are. Are they truly the “bad guys” at the Reddit users are trying to make them out to be?
Aiden: Yeah, it's like the David versus Goliath type of thing right. The bad guys are out there. Yeah. You're trying to go up against them and so basically it all started off with someone on Reddit saying, you know, GameStop has proven fundamentals, obviously the market and the rest of the industry doesn't believe this. But the thing is, if you think about it like this, you know all of those that are on Reddit right now that are at home because of the pandemic, you know they're out of jobs. They feel the frustration of what happened back in 2008. So technically, they're putting all this level of frustration of 2008 on these hedge funds because of the fact of, you know, someone lost a house, the value of their portfolio drops because the market crash in 2008. So they have this level of frustration and so they came out storming and gusto against these hedge funds. But in actuality the hedge funds weren't the ones that found it, well, technically they did find some sort of irregularities in 08, but the thing is, the ones that were to be blamed were the investment banks. You know, most of these hedge funds actually did the legwork that regulators didn't have the opportunity to find because you know they didn't have the power to do it because they were perhaps stretched so loose so most of these hedge funds probably found this type of negativity and they were probably out there saying hey, this is what's happening so and then they were probably laughed out and one of the greatest movies that I can actually let your viewers or listeners kind of connect to this is the Big Short. In the movie you have one hedge fund going out there saying hey is this illegal? What's going on in the industry and they were left out. They were saying hey, you know what? And that's how it is right now. This is how it goes. So technically, are they truly bad guys? That's one of the hardest things to answer because it all depends on. Where do you see it? Because if they make money off of it, you know, but yet they're over here, you know, telling you what's going on, are they truly the bad guys? I'm neutral on this as you know I have to remain neutral on. But at the same time, it's like, okay. It all depends on how you see it.
Samira: Yeah, no that that makes sense and you know when you bring up the example of the Big Short, I think it kind of helps people understand. Oh, you know, maybe it's not the hedge funds we’re really mad at maybe it is the investment banks that end up, you know, making all of these bad loans at that time and you know we're frustrated with that. But you know now, a lot of people are asking, so what was the goal of the Reddit users? What were they trying to achieve by holding their stocks in GameStop?
Aiden: Yeah, honestly, I think they just wanted to be heard and the reason why they wanted to be heard was because they have felt that Wall Street has become a way where they make money and you know the little person ends up not being anything. But in actuality that goal was perhaps not completely thought out because when you're holding now GameStop stock, you are literally now stating that the fundamentals of where this company is trading at, let's say it's $500 is equivalent to those of big tech companies out there, so in actuality you're hurting yourself because if everyone is saying that the fundamentals point there, that can end up even worse for you because The thing is now you're stating that it should be making more than enough revenue and creating more earnings for you as an investor. Right? But in actuality, most of the numbers out there are stating otherwise. So I don't know about you, but the last time that I went to GameStop was years ago, I don't see anyone going you know, making huge lines out there, but then it's all, you know, it's all speculation out there, and that's the the key here. Where if you're able to speculate, you can buy this stock at whatever price. You buy it at $1000, if you believe it's worth $1000, but you need to have some sort of thesis towards it. And I believe everyone thinks that by holding it, it's going to shoot back up. And this is the drawbacks of what was called a momentum trade. When momentum trade builds up so much steam in the beginning and then all of a sudden at the end those that came or arrived to the party are basically the ones that are much more of a bigger loss. So in essence, holding the stock of GameStop may not have made sense for them, but again, it's whatever they believe in now. It's whatever they make the pieces of of whatever it is that people believe the company is worth. And again they have every right to say that the stock is worth $1000.
Samira: Right, and that's what makes the markets kind of go is, you know, you have people on both sides of the trade, which is very important. And you know, looking at the fundamentals and if we just look at the fundamentals of GameStop, their stock shouldn't have been worth $500 at one point. You know, like you said, the pandemic has definitely squeezed them even more than what they were used to. I mean as a gamer, you know, and all of our gamer friends too, they you know buy their games online. You know, who needs GameStop anymore. So it's, you know, unfortunately the truth but GameStop was kind of that symbol of, you know, David and Goliath. So they definitely got, you know, all convoluted I would say but, so you know, moving on to the ethical parts of this, I think we both agree. You know, I think it's safe to say that we both agree that the risk that the amateur retail investors took on, that was something that was the big ethical dilemma behind all of this, and they were basically told to do something and it looks like now they've lost the most and you know, I understand that they're definitely trying to give you know the big bad guys a taste of their own medicine, but unfortunately they took on a risk not understanding it. So do you agree with that as being the biggest ethical dilemma?
Aiden: Yeah, well yeah you know, the thing is that in order for you to actually learn something, you have to do something right? And just like how you said that in Wall Street or just in investing, there's always someone on the other side of the trade. Someone will always benefit while you know you perhaps may not, right? So were they really, truly giving them a big bad taste to the, you know, the big bad guys maybe, but at the same time these institutions, that's the reason why these institutions are out there is because most of the investors that are part of, you know a hedge fund., they are the ones that have—they are considered to be sophisticated investors. So that means that these types of investors can stomach these losses, whereas a regular person may not, you know, and that's the ethical dilemma saying, ell, why is there some sort of a vehicle for ultra rich people, but at the same time these are not only just for the rich, right? You have pension funds that rely on hedge funds, whereas they provide the future cash flow to when you retire in whether you're in a union or teachers pension. You know, all those things come into play, but the thing is that the social dilemma behind this ethical dilemma is the fact that you know, they put, the amateur investors wanted to be on the same level, but the thing is, they're constrained by how they they incur—their own salary, their own limitations to their own cash flows. So that's the thing you know. Is it a taste? Right? Sure, they wanted to be voice, and they were right, but the thing is, now, it's like the ones that hurt the most are the retail investors and they do not have the means to continue on and stomach these losses. You know one of the things that I was going through on Reddit was some people were throwing in there and saying, hey, this is my whole retirement account. You only live once. This is my whole student savings account. You only live once. Yes, you only live once, but now you have to work twice as hard in order for you to gain this money. So it's hard, right? If you don't fathom the notion of what you may be doing because you get caught up in this. Right, so in essence, you know, is it an ethical dilemma, sure, but the thing is, who is more at risk here? The amateur retail investor or the sophisticated person that understands the notion of passing this on to a professional to handle their money, right?
Samira: I'm really glad that you brought up the the pension fund side of it and you know, that's a whole other dilemma that people can talk about. Like why are pension funds part of hedge funds and right now unfortunately, with the low interest environment, you know, that's one of the only ways they can produce a cash flow, but you know that's a whole different argument. But at the point of all of this is at the end of the day, it's ending up hurting us, you know the retail investors in multiple ways, so a lot of people lost their money. And now if they were trying to, you know, make these hedge funds collapse they might have lost, you know parts of their pension account, so you know there's a lot more to this than just I want to get back at Wall Street. There's a lot of other things that people need to to consider too, so I'm really glad you brought that that perspective up. And so you know, moving on from my perspective, it seems as though this is just the beginning of more to come from retail investors. Do you share that same sentiment?
Aiden: 100% and here's the reason why. Now that they understood the risks, and the nature of how the stock market works, that's going to put them more interested into learning more. Now the question is, do they want to make their own informed decisions or pass it on to someone else? To, you know, make this informed decision, retail investing is here to stay, and platforms like Robin Hood has made it much more feasible. And that's another topic that we can discuss because you and I both know about it. You know, we've gone back and forth can have discussed that of Robin Hood. But it's not veer off into that. But I do believe that retail investing is here to stay, and especially since you know the whole notion of they got the taste of if they were able to win big in the beginning, because obviously in order for a momentum trade to to work is if you get in in the beginning and get out in the beginning. If you are towards the end of it, you are at the very end and you're last to the party, so they got you know the taste of both the good and the bad. So again who ends up winning here? Right, one side wins one side loses. So in order for you to actually learn from this you more than likely will learn more from it, if you lose from it, but you will continue on pushing further if you continue winning. If it the probabilities are against you though, because we all know that you can't always keep winning, right? So yeah, retail is gonna be here to stay. And I have a feeling that they're gonna perhaps keep voicing their opinions like they have with Reddit so no one knows exactly which other company is gonna be out there that's gonna you know perhaps spike up in price? Is it even possible again? Sure, the probabilities of it working out again probably minimal though.
Samira: Yeah, no, that's a very good point that you've made and and at the same time we want retail investors to— we want those to come back because it helps the markets become more efficient. You know you have people not following a big trend of like, oh, you know this stock is going to fall or that company is undervalued. You have different perspectives, different opinions, and that makes the market more efficient. So on one hand I'm really sad that this happened to all these retail investors, but on the other hand, you know they've created a trend now that's actually going to help all of us at the end of the day. Sp I'm really happy about that, but for our viewers that you know might have gotten involved with this short squeeze, what advice would you give them right now?
Aiden: Wow, so if you were able to stomach the whole notion of—if you're still in it from the beginning to the end my kudos to you because I think the last time that I checked, the stock was around $80 so imagine going in at $450 and now you're at—you're down at 80 that's a big big drop, right? But if you were able to begin at the beginning ride it up and you were able to get out at the right time—this is what market timing does—more kudos to you because you were able to create a net gain out of that. Now if you were at the very very end of it, you know take this as a learning perspective of it because you can't time the market and especially if you day trade. Day trading is not meant for the individual that's busy or you know that that is just going to think oh, you know, if I leave it there by the time I come back it's gonna shoot back up. It moves much more volatile. It moves way up and down crazy, so it's not for the faint of heart. So in essence, if you were able again, if you were able to get in, in the beginning and out in the beginning at the right time kudos you made something you know, will this happen again? Probably not. The probabilities of another thing coming out like this may not happen. And then if you did end up at the very end of the party, as I like to say, just take it and take it as a grain of salt, as knowledge and hope to learn from it of not going into a trend type of momentum trade. Because if you get caught up in the wrong side of it, you can easily lose and it's hurtful that nobody really likes losing, actually.
Samira: No, not at all, so yeah, that's some good advice. Do you have any other advice for you know, our other listeners that may not have gotten involved in this?
Aiden: Yeah, so basically again the investing is out there for everyone as I like to say and you know since I am a financial advisor, that's why you brought me in the last time, you know all I can say is if you do want to begin your own investment account, it's easier now because of different platforms. And it's up to you to make that informed decision, if it's for you to do the research, do all these fundamentals do all of this and do all of that because it does take time. So now imagine working from home or having a family and you're trying to over here manage your portfolio, your own money, and you know it's time consuming and we can't do everything right now, right? So you have to make that decision. If you do have the time for it, that's great. Learn more from it. There is educational videos out there that tell you how everything kind of, works, but you know, make that decision. Whether do you want to continue, if you are currently managing it right now, move on forward, you managing it or pushing it off to a professional, say, hey, you know what this is too much for me, I'd rather not, you know, deal with it, I'd rather have my time back type of you know thinking, so that's all I can really advise to your listeners and viewers. Also the other thing that I'd like to just point out is just think about the the story of the tortoise and the hare. Right, if we all know the tortoise and the Hare, if nobody really knows it, the story, I don't wanna give a spoiler—well I kind of have to do, but the whole notion is that you can’t expect things to move up too quickly, right? If it moves up too quickly then something is wrong, right? If you're slow and steady, you know, as the saying goes, slow and steady wins. Sorry if you haven't heard that about the that story, but that's what I'm trying to make my point is, you can’t expect things to grow overnight immediately, like something like this. That's why the the probabilities of this happening again is very, very minimal right? When you plant a seed for a tree, you don't see a tree the next day it takes its time, right? And just like this, investing in your money is the same way it takes time. You shouldn't expect it to shoot up immediately like it's Vegas, right? So yeah, that's all I can really provide as some sort of advice to the listener and viewers.
Samira: Yeah, no, and I just wanna add to that. You know we're in this this time of misinformation on social media. So if you're gonna learn about finance and and the stock market, you know, please be careful of where you're getting your your sources from. Number 2, you know as you just mentioned, and you know, there's an opportunity cost with everything, so either you can spend your days, you know, trying to be a retail investor, and you know do it yourself—and I applaud you for that really, but sometimes we are too busy for that kind of stuff and we're gonna need a financial advisor like Aiden to do that. And if you hadn't listened to our last show with Aiden, he's a fee only financial advisor, meaning he does well when you do well, so he has that incentive to make sure that he does what's best for you because at the end of the day, it will help him. He's not commission based, you know it's not something that he's just going to profit off of whatever. So he really has your best interest in mind, so you know you can reach out to him at Wolfpack Investment Management and I'm sure he'd be more than happy to talk with you.
Aiden: Yeah, I'm always glad to take any type of meeting with any of your viewers or listeners. I've actually gotten some viewers and listeners to actually reach out, so I'm kind of happy about that and I appreciate coming onto your platform to discuss what it is that I do. And, you know, at the very very end we all want, you know, to be like the Reddit users, right? We all want to have our part right, but at the same time you can't really make your part be done so quickly right like, you made the statement great, you know, now this is a way for you to continue on making your voice be heard and be part of you know the movement and albeit it may not be as loud, but you know you are part of whatever they were going after, right? They felt like they needed a voice because they lost so much in 2008 right? And it's natural, it happens and you know all I can think about is just, you know, just be safe out there and as Samira just said there's misinformation out there. I think I heard that the SEC is now looking into things that were posted on Reddit that were perhaps manipulating people to continue on and nudging them to keep going with all this information so. At the very end though, the person that makes that important decision is you, the individual that you know, if you want to invest in this or not. It all falls down to you and then really it's your vetting process that you need to create if you want to do it all on your own.
Samira: Yeah, no it's—I definitely agree with that and you know with that I'd like to really say thank you again for coming on and we'll definitely have you back again, especially with more crazy stuff that happens in the in the market. I think you explain things in a very simple way and I hope my my listeners agree with that. I'm pretty sure they will and hopefully we don't have something crazy like this happen again, but if we do, we know that we can always count on you to come back on and talk about it.
Aiden: It feels like 2021 is still kind of like the twin of 2020 so far, but we'll see what happens. But yeah, I'd be more than happy to come along and try to explain as best as I can. You know, in simple terms and using everyday vocabulary, non sophisticated jargon in order for your listeners and viewers to actually understand what's going on because essentially everyone is interested. You want to make sure that that you're providing as best as possible some sort of information that they can take some value out of it and learn from it, actually.
Samira: So yeah, no for sure you know that's great. Yeah, I like that we ended on that and because this podcast is just dedicated to explaining things in the simplest way to everyone. So thank you again Aiden. And you know, I look forward to talking to you soon.
Aiden: Sounds great, me too. Thank you for having me.
Inflation Concerns
Inflation Concerns
A Conversation with Dr. Mark Pingle
I had the honor to have Dr. Pingle as my thesis advisor for my Masters in Economics. We studied the externalities affecting housing segregation along with income inequality. Since we are both very interested in the macroeconomics field I thought it would be great to have him come on and address many people’s concerns of inflation.
But before we get started, I first want to give Dr. Pingle a formal introduction. Professor Pingle has scores of publications in macroeconomics, behavioral economics, and experimental economics. He has served as Chair of the University Department of Economics and president of the International Society for the Advancement of Behavioral Economics. Desiring to more personally facilitate economic development in Northern Nevada, he shifted a large portion of his efforts toward the development of entrepreneurial talent. He spearheaded the effort to create the entrepreneurship program at University of Nevada, Reno, subsequently spearheaded the creation of the community Entrepreneurship Nevada effort, and remains devoted to seeing entrepreneurial capacities developed at the University and in the community. To listen to the interview, please check out the podcast. To view the video interview click here. The following is a transcript of our conversation.
Samira: So first off, thank you so much for coming on and talking to us, Dr. Pingle. I know I've been receiving a lot of questions about inflation and I'm really glad you'll be lending your thoughts on it all.
Dr. Pingle: Yeah, happy to be here.
Samira: So let's dive right in. There's been no doubt that COVID-19 has created tremendous disturbances in the economy. And one major component that's been overlooked has been inflation. And now with the Fed’s recent monetary expansionary policies we've seen and, based on the quantity theory of money which basically says that the general price level of goods and services is directly proportional to the amount of the money supply, we should be seeing a rise in inflation happening. Why do you think inflation has not risen yet? And do you believe it will?
Dr. Pingle: I think there are two reasons we haven't seen it, and whether or not we will, will depend upon some Federal Reserve actions, I think, and people's behavior. You're correct, the quantity theory of money directly relates the quantity of money to prices. The assumption there—the important assumption is that if people have more liquidity, they'll spend it on goods and services, but there is another option. The other option is they can spend it on assets. And so what it means individually is rather than spending your money, you save it. And there are many savings vehicles, stocks, bonds, real estate. If you look at the data, it indicates because prices haven't been going up of goods and services, but prices of stocks, bonds, real estate have, and it's very clear if you look at the data. That disproportionately the money's been going there rather than into goods and services. And so that's why the quantity theory of money isn't really explaining things right now. That's reason 1. Reason 2 is that when the Federal Reserve purchases, assets, and the main asset that they've been purchasing really since 2008, well, 2008 is a little bit different, but you know we had a financial crisis in 2008 that was associated with the housing market and so the Federal Reserve there—to rescue banks that had many bad mortgages did something that they hadn't done. They had purchased a lot of those mortgage securities. That put money into banks or into the economic system. The more normal thing and the thing they've been purchasing relative to covid are our national debt. So when government say with the Covid, what did they call it? The CARES Act where they spent so much money, a couple trillion dollars. Where did they get that money? They didn't get it by increasing taxes on all of us. They borrowed it, right? Well individuals, and banks and institutions across the world borrowed a good chunk of that money, that extra 2 trillion, but not all of it. The Federal Reserve, it seems, purchased about a trillion of the two trillion rough numbers I could be wrong. You might want to check that more carefully, but they bought a lot of it. You can see it in the data well, where is that money now? It's actually not out floating around in the economy. It is in banks. And I guess I'll finish up by saying why haven't banks just loaned that out? There are a couple of reasons they want to make sure they get it back, so they have to be confident enough about the people they loan it to—worried about default. But the other thing, and this is a major thing, is the Federal Reserve coming out of the 2008 nine financial crisis introduced a new tool and that is they pay banks, now interest on their excess reserves. So as the bank, if you have reserves, you don't have to loan them out to make things work. You can receive interest rather than by making car loans, home loans, other loans, you can receive it from the Federal Reserve, and so the Federal Reserve is using that tool to let that money out into the economy slowly rather than rapidly because if it went out rapidly, we would have both tremendous inflation, the quantity theory of money would predict. And we would also have even more potential for bubbles in the stock market, in bond markets, and in real estate. So long winded, but hopefully that explains some things.
Samira: Yeah, no, that was really helpful. So thank you for that. And you know now the Fed has recently announced that it will be buying $80 billion a month in Treasuries, and $40 billion a month in mortgage backed securities. Do you think this will increase the risk of inflation further and and why do you think the Fed decided to pursue this course of action?
Dr. Pingle: Well, the why is easier. The why is the Federal Reserve has a very strong incentive now to keep interest rates relatively low. They wouldn't have to because they're somewhat independent of the national government, but as you know, we have more—I don't know—I looked at the national debt clock recently. It's been a pretty fast though, right? $22 to $26 trillion. I'm not sure exactly where we're at. If you looked at our national debt in the 1980s, now we would just love to have a debt level that small but interest rates were very high in the early 1980s, and so if you look at interest as a share of our national government's budget in the 1980s, it would be higher than it is today, even though we have all this debt. How is that possible? Well, it's possible because interest rates have come way down. So I know you're into real estate. Well, you had home mortgage rates in 1981 of over 20%. If you can imagine that, that means for the same value of home, you know on a 30 year mortgage, most of your payment is interest. If you have five times the interest rate, you're going to have five times the payment, roughly, on the same home, and so you could see how that could kill the housing market. So the Federal Reserve would be a little concerned about that, but just think of what would happen to government’s budget, if instead of paying the interest rates they’re paying now they had to pay five times the interest rate. Pretty much all of our tax dollars would have to go for interest alone, and so there is a tremendous pressure on the Fed to keep interest rates low. And that's why they buy up those securities if they didn't, then how will the federal government borrow more money? The only way is to let the interest rate rise so other people other than the Fed will borrow that money. So that's the why. For the second part of the question: Well, it increases it in that it puts more reserves out there and so it makes it that much more important that the Federal Reserve not let the air out of the excess reserve balloon or the banking reserve balloon too quickly.
Samira: Ok, yeah that makes sense and now you know you just touched on interest rates being low. Fed Chairman Powell mentioned that he doesn't foresee increasing interest rates till the very least you know 2023, and on top of this he states that he hopes inflation will increase to around 2%. Do you think we'll start seeing this happen?
Dr. Pingle: Well, the main reason inflation is low now, I would say, is because of all the Covid shutdowns. And people don't have income, they’re nervous, so they're not spending. You might think, well, with the shutdown you lose supply, so it creates shortages and I think that has happened. Some things the prices have gone up. But also there's still enough unemployment and nervousness about the future that people aren't spending. And so I think they're saying they want more inflation. Inflation has come down, it's in the high 1’s,Now 1% to 2%. Their target has typically been 2%. The bigger challenge they'll have is once the vaccinations start to take effect and the economy opens up, there's all this money out there, they're gonna be back to trying to keep it down to 2% rather than up, and so I don't think they'll have a problem raising it to the 2%. I think the bigger problem is: Will they be able to keep it down with all this money out there?
Samira: Yeah, and that leads to, you know, the big question and kind of the elephant in the room: Do you think there's a risk of hyperinflation for all the money we've printed recently?
Dr. Pingle: There is, but the interesting thing I think the bigger risk right now is bubbles bursting like we've seen in the past. So if you look at stock valuations, if you look at real estate, if you look at bonds, pretty much every savings vehicle, you look at it compared to history and you think these assets are pretty high priced. And so in the past when other nations, not the US, have gotten into debt trouble, they normally haven't paid it off. The people who have suffered have been people who who lent that money and then inflation devalues the debt. So the inflation tax is the typical way that debt has been repaid. This time, and there's another concept here, if the inflation rate goes up, interest rates will go up, and that's because savers—it's the Fisher effect—is the formal effect, and so, the Federal Reserve has a strong incentive to try to keep inflation from growing because they cannot control nominal interest rates if they don't control inflation, and so it's a tough go. As I talked to you a little bit about before we got on here, coming out of the 2008-9 financial crisis, the Federal Reserve had purchased a lot of assets, mortgage backed securities mainly to try to help with that crisis, and they had done, in my view, a masterful job of keeping all those excess reserves in banks from being loaned too quickly and keeping inflation close to that 2% target. And over about a five year period, they reduced those reserves from $3 trillion or so to $2 trillion. If I remember the numbers. So it took about five years to reduce it to $2 trillion they had another, maybe 10 years to go to get it back down to the trend. Well now because of Covid, we've bumped up way more than it took them five years, so if you look at the time horizon based upon how they had been doing it before—we're talking decades of of policy to try to prevent inflation. So I would say yes, there is a pretty big risk. It's conceivable that they can do it, but I think there's a pretty big risk, and we're going to do more, right? It seems. So yeah, unfortunately there's not a lot of good news on that front, but you know, let's hope that you know we have people in power that can take on the task.
Samira: So I think my final question is do you have any advice you'd like to leave our listeners with?
Dr. Pingle: Well, I'm thinking about this for myself. If there is inflation and you have a relatively fixed retirement—and I don't know is Social Security indexed to inflation now? If it is, then you're okay. If it's not, then people's retirements, if you have Social Security, or you have some fixed income. So thinking about how to protect your retirement from inflation I think is wise. The traditional things there are hard assets like gold. I think one reason people have gone into real estate is people have to have a place to live. So I would probably go into residential housing rather than commercial. But rents will tend to go up with inflation, and so I would expect that that might be a place money would go. But gold and Bitcoin, I personally don't know enough about these alternative currencies, Bitcoin and that to invest in them, but they're going crazy. So people are doing that. Well, there's a lot of volatility in every asset, and it's because two things are working against one another. On the one hand, there's a lot of money out there and you if you are concerned about inflation, do you just hold money? Well, that doesn't make sense, you just lose it all, right? And so people are putting it into stocks, bonds and real estate because they don't want to earn 0.1% in their bank account right when inflation is 2% and so we gotta find something. At the same time you look at the valuations and they're overvalued and so are you going to be the one who's holding the stocks when there when the prices cut in half? So people are nervous and when stocks go down they get out and so I would expect continued volatility and maybe increasing volatility. Even in things like real estate prices because they are so high priced that that there may well be a bubble or bubbles that burst. And so I think when you think about how will ultimately get out of this, I think there are two potentials. The traditional way is inflation and just people who are holding cash. Or have more retirements that aren't protected by inflation, they pay the price. The other way is bubbles bursting and so I think we'll probably see both. It's hard to know and the trouble is, everything is fine. Everything is fine until it happens. And then it happens all at once and, you know that's the way when bubbles burst. That's the way it tends to happen, so I would expect some wealthy people, right? Not just poor, poorer people are disproportionately affected by inflation. Wealthier people are disproportionately affected by the bubbles bursting and so hard to predict which of those will happen more. I would predict more of the bubbles than the inflation because the Federal Reserve has such a strong incentive to try to control that.
Samira: Well, that's an interesting take because you know a lot of economists agree right now that we're in a K-shaped recovery. But if what you're saying is true, that would help us go back to a somewhat an equilibrium. If both sectors are kind of, hit in in that sense, you know with the wealthier people getting hit with the bubbles more than the you know, the less fortunate people getting hit with inflation. So I think that's that's an interesting way to look at it. I hadn't thought of that myself.
Dr. Pingle: Yeah, well, we'll see what happens unless you're hit by a truck, you'll get to live through it. So, so that's good.
Samira: Yeah, yeah, it's hard to predict what will happen next, but it's good to see all the different possibilities and I hope our listeners can kind of understand it and decide for themselves what they think they should do.
Dr. Pingle: Yeah, well it's not a simple thing. I think one of the best insights though for me maybe I'll leave you with this, but if you have more questions it's fine. But when I think about inflation in the quantity theory of money, it was really eye opening to me to just recognize money has two places to go. And that's why predicting what will happen is difficult. If it disproportionately goes into assets, then it creates can create bubble and then you have that problem. If it disproportionately goes into goods and services, you have inflation and that problem—and the the Federal Reserve can control a little bit where that goes, but it's people's behavior. I mentioned that earlier. It just depends upon us if we're saving oriented. It goes into the assets and you have the bubble situation. If we want to spend we have more of the inflation, so we've been putting it more into the assets I think, and so that's where we are at now. Assets of all types are highly valued. Yeah, not so much inflation, which is a blessing, right? We've really been blessed, but there may come this reckoning, right? To where yeah, you get hammered with one of those two.
Samira: Yeah, that's what I've been warning people about because I said, you know it's great until you know we have to accept what's happening. You know with the eviction moratoriums I keep saying we're kicking the can down the road, a $2000 stimulus check may not help people's back pay and and all the back rent that they owe, so we'll see what happens. I hope we can get out of this unfazed, but it's looking more and more unlikely that that will happen.Well, thank you so much for coming on and I know I really appreciate you and all your insight and hopefully we'll have you on again.
Dr. Pingle: Happy to do it. You're doing great work here.
European View
I’m really excited to continue seeing the growth of this podcast in Europe! I hope it’s a way that can help Americans understand what’s going on in Europe and for Europeans to understand what’s going on in the US. This time we will be looking at two countries specifically; Italy and France.
Italy
There’s been a lot going on in Italy for a number of reasons. See, not only have they been dealing with the global pandemic economic effects, but they are also undergoing a political crisis. I won’t bore you with the details, but basically Italy’s government has fallen apart. There are many politicians in the country calling on Mario Draghi, former ECB President to lead the country until the next election in 2023. Though, there are many other Italian politicians saying that this will only lead to a technocratic rule and that they won’t support Draghi and are pushing for a vote.
Whether Draghi becomes the next Prime Minister or not will be seen in the coming weeks. Though one thing is very important. Italy is set to receive approximately 200 billion Euros in loans and grants from the EU’s Covid-19 recovery fund. It should be noted that Italy’s share is the largest. The use of these funds are extremely important as it not only tests Italy itself but also the EU as a whole in being able to bail themselves out of the current economic mess they are in.
Recently, Moody’s downgraded Italy’s credit rating to just above junk bond status. This is incredibly big as Italy is also in the midst of a political crisis. To further the already great skepticism of if Italy can get through this crisis, the Italian Treasury has announced that Italy’s debt to GDP is expected to rise to 158.5% in 2021. There are two major factors that are working against Italy right now which is high debt and low growth. The fact is, Italy is the third largest economy in the EU, so to have it fail over the next year would be very detrimental.
The map below shows that Italy had a GDP contraction of 2% in the final months of 2020. Overall, the Italian economy shrank by approximately 10% in just 2020 alone. This is adding to the low growth factors making it hard for Italy to continue on. Again, to have a 158.5% debt to GDP ratio is very disconcerting. But, with Mario Draghi having quite the reputation behind him, my hope is that Italy can overcome this economic crisis.
Map 1
European GDP in fourth quarter of 2020
https://www.bloomberg.com/news/articles/2021-02-02/italian-economy-shrank-at-end-of-2020-underperforming-peers?sref=jbVt2saA
I also want to take some time to point out the youth unemployment rate in Italy.
Graph 3
Italy Youth unemployment for 2020
https://tradingeconomics.com/italy/youth-unemployment-rate
Looking at the Graph above, we see that currently the Italian youth unemployment is at 29.7%, which is a lot. With the growing economic concerns, I expect this number to rise not only for the youth but for the general population as well. That is, unless, the Italian government can put the 200 billion euro Covid recovery fund to good use.
There is one slight glimmer of hope for the Italian economy. Recent Italian manufacturing PMI data suggest that orders are picking up and manufacturing will play a big role in Italy’s economy. The index rose from 52.8 in December to 55.1 in January which is honestly great news. This means that many purchasing managers are expecting orders to increase. A main drawback is that supply chains around the world has been disrupted heavily by the Covid-19 pandemic.
Graph 2
Italian PMI Manufacturing Index, 2009 to present
https://www.bloomberg.com/news/articles/2021-02-01/italian-manufacturing-fuels-hope-of-2021-economic-recovery?sref=jbVt2saA
I will continue to monitor the situation in Italy as it will be setting a major precedent in the EU as a whole. I hope they can come out of this economic and political crisis. And I know that internal politics is very important. From an economic perspective, I think Draghi would be a great leader to help distribute the recovery fund, but at the same time, I’m an American. I’ve never been to Italy so it’s not my place to say what’s best for Italy politically or socially. I’m just looking at it from an economic perspective.
France
As a real estate enthusiast, it’s been interesting for me to see how different countries are fairing through the Covid crisis. With everyone moving from urban areas to suburban areas, you’d think that the housing market should be propped up for a bit longer. At least that is the consensus in the United States, though I’m still skeptical of how long. French realtors are already predicting a major slowdown ahead.
Graph 2
French Home Sales 2010 to Present
https://www.bloomberg.com/news/articles/2021-01-14/french-realtors-see-2021-housing-slowdown-as-covid-hits-economy?sref=jbVt2saA
The economic uncertainty is causing many disturbances in the French housing market. This is causing both sellers to become hesitant and it’s become quite hard for buyers to get financing. The French minister of Finance has kept expectations low for the first quarter of 2021 and has stated that there is a chance of seeing a rebound in the second quarter. I appreciate the fact that he is cautioning people’s expectations. I think this is very important thing to do, especially in the era of such uncertainty.
A survey was done in December from the French national real estate federation stating that 47% of participants saw an uptick in banks refusing home loans in 2020 due to the credit tightening measures that were taking place. The Chairman of the Federation went on to note that he expects prices of homes to stabilize with both supply and demand softening. In comparison it rose 4% in 2020 alone.
Any real estate professional, including myself, will tell you that it is normal to see cycles in the real estate market. I will go beyond that and see it’s absolutely healthy. I am really happy to see this caution in French forecasts. Unfortunately, in the US, we like to be too optimistic about data that comes out. I think it’s always best to temper expectations, to not give into hype that easily.
Concluding Remarks
So far, 2021 has not disappointed. So many different changes coming about. The beauty about humans is that we have the ability to adapt to our environment. Changes aren’t easy but they aren’t impossible to thrive in. Many people have asked me when I think we will return back to normal again. My response is a question: What is normal? We will never live the life we lived in 2019 again. That’s the beauty of time though. Constantly moving and changing. But change doesn’t have to be bad. I think we’ve started to idealize the lives we lived before the pandemic. Myself included. But, I constantly remind myself that the future is going to be brighter than ever, we just need to endure these dark days to enjoy the brightness again.
Though, I’m pessimistic about the track our current economic future is on, I’m also optimistic about the changes that will come from it. In any case, I want to give a big thank you to all my supporters and listeners! I’m so happy that this blog is becoming more and more popular and I can’t wait for more changes afoot. Till next time!