Animal Spirits Podcast - The Second Wave (EP.139)

Episode Date: April 17, 2020

We discuss the path to normalcy, why the economy is going to be operating at partial capacity for some time, when people will begin flying again, why people are so angry with the bailouts, counterintuitive real estate trends, why colleges may be in trouble this fall and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

We've been telling you about the tech meme ride home podcast, and it's the greatest daily podcast to catch up on tech news every day. They also do interview episodes with folks like Howard Linson, Steve Case, and Driesen Horowitz partners, Jay Yarrow of CNBC. Search your podcast app and subscribe to the TechMeme Ride Home podcast. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Batnik and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management.

This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritthold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Annal Spirits with Michael and Ben. We're filming this on Thursday morning just before the first. The unemployment numbers come out, and I'm sure they're going to be horrible again. The IMF this week said that they think that the coronavirus is going to hit the world economy worse than the Great Depression. Did they actually say that?

Because I tweeted that and somebody said they never said that. Okay. So that's just the headline? Who knows what to believe? I was trying to square that with the fact that they say advanced economies are going to contract by 6.1% this year, and emerging economies by 1% this year. Wasn't it worse than the Great Depression? than that? Way worse. That's what I thought. Didn't GDP decline 25%? Right. Yes, it did. So I don't know

what they're basing this on. Obviously, the growth forecasts are bad. And here's one thing I haven't seen. We've seen a lot of the GDP stuff. And maybe it's hard because people just don't know. Has anyone put out a estimate of what inflation slash deflation will be? Are we going to get a crazy low inflation number or is because the Fed and the government pumping out all this money that's not going to be the case, because there obviously are people who are predicting inflation. Break evens are not signaling inflation. There was actually a collapse a few weeks ago. And we've been getting a lot of emails about inflation. But if you think about what drives inflation, too much money chasing too few goods is one of the common themes. Another one is high

energy prices. I'm not worried about inflation. I'm saying, are we going to get like this crazy deflation number from this? Probably. Are we going to see like negative 5% inflation. I'm saying probably like I know anything about what actually causes inflation, but I don't know. It seems like... Maybe this is just one of those things that the variables are too hard to predict. And that's why I just haven't seen anyone predict it yet. So I think out of all of the indicators, variables, economic signals, inflation is like the one that nobody has their arms wrapped around. Yes. So obviously the economic data is going to continue to get worse. And we've had a few people actually emailed us and said, well, because unemployment benefits are so much better,

is this really not as bad as it seems? And is it going to be harder to get people off of those unemployment benefits to go back to work when this is all over? I don't really believe that's the case. A lot of it depends on how long this lasts, because I think that's a short-term bridge. I think they extended the unemployment benefits for four months to get that extra bump. So that's not that long of the time in the grand scheme of things, especially if this is going to be with us for 12 to 18 months or whatever it is. I still think that's a short-term boost and not a long-term solution. How long does unemployment insurance last? Well, I think people are going to be good for a year, but boost is for 4%. So it provides a bridge for sure for those people who are losing

jobs, but it's obviously not a long-term solution. I think a lot of people, I mean, are there going to be people who say like, oh, this is great, I'm making more money than it was before? Sure. but there are also going to be people who say I am losing my mind and I need to get back to work. I think there's going to be much more of that where people are going to and maybe silver lining this provides people the incentive

to say, you know what, I didn't like my job anyway, I'm going to find something new and I'm guessing there's going to be opportunities for people to try something new after this because don't you think that there's going to be companies that are going to need more labor after this? Certainly, obviously there's going to be industries that aren't

going to need any, but I think maybe there's going to be a shift in the places people go to work after this. What if a lot of these businesses don't come back and there's so many more people looking for jobs and available jobs? Shouldn't that put pressure on wages down? Also, in the camp that inflation is not going to be an issue? Potentially, but the other side of that is, are they going to have to actually increase wages to get people to do the jobs that need to be done? Like the grocery shoppers and people that have to go out and actually do, they can't do it from their home. Yeah, I don't know. There's going to be some, maybe that's why it's so hard to know. So Howard Marks has recently turned into a financial blogger. I haven't seen him on FinTwit yet,

but he's been putting out these memos, and they're like 10-page memos for probably once or twice a week now. Are they on medium or substack? And so not getting into the investing stuff because the stuff he's been talking about is kind of the stuff we've been talking about how uncertain things are. But he had a few questions in here that I thought were pertinent. And so he said, assuming the quarantine is lifted, when will you take your first flight? And how would you react when the person starts to cough next to you? He also talked about when is it going to feel safe to send your kid back to school. What happens when everyone goes to work? When will you feel okay going to a restaurant? And I think these are the

questions that are impossible to answer now for people. So right now my wife and I were supposed to be in Florida on a vacation. I'm guessing I'm not going to take another vacation for a long time, at least a year, I would say. What would it take for you to assuming there's no vaccine? What would it take for you to get on a flight today. Would you have to be tested when you get on and tested when you get off? Would you have to have everyone be temp checked? What would make you feel comfortable to even put yourself in that situation right now? Wasn't there talk about them developing a test that gave you pretty much instantaneous results? Right. Honestly, I think that is probably what will give people the most confidence in a lot of this stuff. And I think that's probably a long

ways away till we get. We obviously can't even test everyone who's not feeling good right now. So what does that do to a loading time? Is it going to take three hours to get onto an airplane? I am sure everything is going to be slower because of this. I honestly think that is the place we have to be where everyone can get a test anytime they want, where it's almost like a home pregnancy test that you can get it just to help your fears. If you thought, okay, I was in this place, I'm a little worried. I'm going to take a test when I get home just to make sure.

I think that's one of the only ways until a vaccine or treatment is figured out, but that's going to make people feel better. And obviously, maybe there's this immunity thing where if you've already had it, then you walk around feeling invincible, so that you can't get it again. But I think that it's all about the testing for me because there's so many things right now that I think are just completely off the table for me going forward for a while. I was talking to Robin, like, what if school doesn't reopen in September? We were talking about that this morning, too. I'm sure there's going to be people who even if they try to reopen are going to say, I'm not sending my kids back yet until I know they're safe. The Wall Street Journal had a deep dive on what the economy, quote unquote, reopening looks like.

And they just said it'll be fragile, partial, and slow. And they talked about how at Disney Shanghai right now in China, guests must wear masks all the time. They can only take them off for eating. Hours are limited. Capacity is limited. Just to gain entry, you have to submit a temp check and present a QR code that indicates your virus-free. So maybe that's another thing. Like in the movie Contagion, I think they had to wear wristbands that showed that they had been tested

or they were immune. And they talk about, like, Tyson is a manufacturing, that they're installing these walk-through temperature scanners across its plants across the country, looking for symptoms. And Texas Roadhouse is saying they're going to potentially install plexiglass dividers between the booths. Honestly, I think, unfortunately, as bad as they've been hit, bars and restaurants, maybe one of the last things where people feel comfortable going because you're in such close quarters?

Counterpoint. I think restaurants, yes, bars. No, just because think about the people that go to bars are younger people. Yeah, it's possible. I just think it's going to be tough for a lot of people. But counterpoint to this, and again, silver lining, are there some good scientific things that come from this that make us a healthier society going forward? Are we going to see this big breakthrough in science and health care that this will actually

help us and maybe help us with other diseases going forward in terms of tracking them and helping out with them. I'm just wondering, in 50 years when they write more history books about this and look back at this time, are they going to look at us and laugh and say, look at those idiots. They weren't prepared at all and they had to shut down the economy. Are they going to say this was a turning point and now things are so much better because of this? Yeah, I think the latter. I think that this is going to make us much more prepared for the next one. I'm pretty optimistic on that front, maybe naively. And if we're not, then I feel sorry for us, unfortunately, if we don't take some lessons away from this. So Dr. Fossey talked about, they had a story in ESPN about professional

sports. And he said at least until 2021, the only way sports are going to turns is if it's fan-free. I was thinking about high school football comes back in the fall, things like that where there probably aren't going to be able to be people in the stands, maybe family. It's just going to be, life is going to be very weird for a while. Jobless claims just came at 5.245 million. down from 6.615 in the previous week. So we're over 20 million people that have filed for jobless claims in four weeks then. So that's roughly 12 and a half percent of the labor force, call it. Again, I don't know what the upper bound was for unemployment benefits,

but you wonder if they underestimated, and this is actually going to be a fiscal stimulus boost if all these people are able to get this unemployment. Again, a short-term bridge loan thing, but that's tough. Okay, so the Atlantic had a piece titled The Millennials Don't Stand a Chance. This is by Annie Lowry. And it's going through all the reasons that millennials have gotten the short end of the stick

because student loans and wages have been stagnant. And they came in during a terrible job market in the crisis. And now this, obviously, I agree, millennials have had a tough run here. Do you think that they were saying the same thing about baby boomers in the early 80s, though? I mean, so in the late 70s, the 1970s were just an awful decade economically. Inflation was running rampant, interest rates were going nuts. Don't you think that baby boomers were kind of facing a similar thing where they looked at the past 10 or 12 years in like 1982, right before things just got glorious in terms of

the economy and said, baby boomers are getting the short end of the stick? Again, I'm trying to look at glasses half full here for some of this stuff. Put yourself in a baby boomer's shoes in 1982. First of all, hang on. Hang on. Before we answer that, let's just look at the data. So she said, data for progress found that a staggering 52% of people under the age of 45 have lost a job or had their hours reduced compared to 26% of people over the age of 45. So here's what I think. I hate to be that guy, but this was a survey of 2,600 people.

So that does sound bad, but I don't know how close that is to reality. Here's the thing. Think about the difference between the early careers that our parents had versus the early. early career that millennials had. And then think about boomers, our parents, compared to their parents who lived through the Great Depression and the World War II and had it much harder than they did. So I think the comps are relative. So I hear your point. But I think when we're comparing ourselves with our parents and then our parents comparing themselves with their parents at our age, I don't think it's a fair comparison. And I think that's honestly one of the reasons

that let's jump ahead. You had this piece about our Americans better off than they were 40 years ago, I think that's one of the reasons that this is so difficult because the previous generations were comparing themselves to a generation who just got destroyed by two world wars and a great depression. So any comps for the baby boomers were bound to be much higher and things were going to be better, right? Yeah, think about what our grandparents said to our parents. When I was your age, I was in Italy fighting a war. Right. And so they went through and that's why they're considered the greatest generation. And so the comps to them, are you better off than your parents were? Of course they were. Of course.

So you did this deep dive on how people are and you looked at the median wages over history and you showed that over the past, what is it, 30 years basically? Since 1972. Yeah, on a real basis. So after inflation, that wages are basically stagnant. And you did this deep dive and you and I talked about this quite a bit because it's hard to wrap your head around this. So what was your conclusion for this in terms of are people better off today or are they not? Here's the thing. I think that these numbers can be misleading. You can manipulate them to show whatever you want, which I learned. I don't think that the median income adjusted for inflation is necessarily the best gauge of what's going on. But I think the main point was we could quibble the details. But the point is that the rich

today are way, way, way richer than the rich were 10 years ago, 20 years ago, 30 years ago. And even though it's not the same people, even though the American dream is alive, even though a lot of the people that are rich today are people that grew up very poor, that doesn't matter because the rich, and I'm saying, like, forget about the millionaire. Forget about the people that have $10 million or $20 million. I'm talking about the people that have $30 billion. It's such a giant, giant piece of the pie, and it's just totally staggering. So I wonder if this is just a natural product of capitalism, especially when you have capitalism that is so tied to the market. And I think that that's true, but it doesn't mean that we can't do better.

So I think like there are some things that we can do, some sensible solutions like, for instance, closing the carried interest loophole seems to be low-hanging fruit that pretty much everybody could get behind, capping CEO pay at, I don't know, 50 times the average employee. There are some common-sensical things that we can do, I think. I think even if people are better off absolutely, so poverty has just gone down enormously in that time. People are living longer. You have better technology than you ever had before. Even if you can say we're better off absolutely on a relative basis, there's a lot of people who aren't better off. And honestly, that's what makes people angry because there are so many people who are so much better off than they are. And I think that's where a lot of the anger stems from. And there was this chart going around saying it was showing from the 50s to the 80s, basically.

This was U.S. private sector financial assets as a percentage of GDP. It was basically in this range. And then since early to mid 80s, maybe 1990s, it's broken out. And it went from three to three and a half times GDP to now five and a half times. And people are saying the financialization and storing wealth inequality, this is showing everything that's wrong with America. And I think honestly, one of the solutions is we need to make it easier for people to take part in these financial assets because guess what?

You're not going to rip those financial assets out of the hands of the rich. If they're the ones who hold them, they're going to be the ones who continue to leap forward because they're making money on their money and they're not doing anything for it because they're just owning assets. So help other people own financial assets somehow. Yes. I don't think the answer is to attack billionaires. I think we need to lift people up from the bottom. So I don't know exactly how we implement your solution. But this chart, to me, isn't this a chart of the stock market? Right. Yes. The stock market went nowhere during the 70s and 80s. And it's gone bonkers since. So I didn't read this chart and say, this is crazy. I thought like this shows

progress, but it's showing progress for only part of the population, not all of it. And that's the problem. Okay, article in the Washington Journalist. Second round of coronavirus layoffs has begun. Few are safe. So the first wave of people were, I guess, lower wage earners. And now it's working its way up the income stream. So ZipRecruiter, for instance, laid off 400 of its 1,200 full-time employees at the end of the March. And it's hitting the gig economy. And there was another article in Bloomberg mentioned this. This is kind of wild. One in six workers in the U.S. are gig workers as far as ADP files them. So that's up from 15% from the start of the decade and would be 25 million Americans. And the problem with this is that these people can't really

file unemployment. So the self-employed people are having a really hard time getting relief, even though Congress has money earmarked for them. So for instance, in Colorado, officials preparing to open applications for the new benefits reckon that 300,000 self-employed workers might be eligible, but they admit that they're flying blind. It's almost up to Congress at this point to say, if you're not bringing any income right now, you're available to this. There was a guy who is, he's an aviation contractor. And I think that there's millions of people like this. And this is what I'm talking about with the inequality stuff. He said, I just paid up everything for April yesterday. And now I have a grand total net worth of $45. Don't you think that

this second wave is going to turn into a third wave and a force wave? I feel like there was maybe a five-day period where we all looked around and thought, okay, we're shutting off the economy. This is going to be bad. But we're going to get the V-shaped or cover when we turn it back on. and obviously that is not happening anymore. I don't know what the letter is or the shape, but for a lot of businesses, the economy is going to be operating at less than full capacity for potentially a long time, at least through the end of this year, probably most of 2021 as well. And so a lot of these companies and industries are going to continue to feel the pain. And even if they get bailed out and get a loan, I mean, if airlines aren't operating at full

capacity, they're still going to lose money and people are still going to have to be laid off from some of these places, even if they had the government guarantee that they have to keep people for, what is it, eight weeks or something, that's not very, so after those promises run up and they've fulfilled the stipulations of their loans, unless there's another loan waiting for them, I mean, there's going to be, these layoffs are going to continue, unfortunately, I think, and because we're just not going to be operating at full capacity, I think, for some time now. So let's talk about what happened with airlines and the Treasury. So they reached an agreement.

These are the details from an article, CNBC. Airlines, including American, Delta, United States. Actually, you know what, before I say there, I want to give a shout to the journalists. There has been so much content from CNBC and the Times and the journal and the FT. Yes, the financial media has been, and they've been covering this from every angle. And, yeah, there's honestly, you and I talked about going back to one show week and it's almost impossible because there's so much good stuff going on right now, unfortunately, about the bad stuff, that there's so many different ways to look at this.

So they applied for portions. I don't know what portions means. Oh, okay, I get it. Of a $25 billion in payable of grants, which is the largest aid package ever so. Airlines employ this bailout requires that they don't furlough or cut the pay rates of 750,000 employees. These are the details. Dallas-based Southwest said it expects to receive a $3.2 billion under the program,

$2.3 billion in payable support, and a 10-year low interest loan of close to $1 billion. The loan will likely include $2.6 million warrants for the Treasury Department and the aid prohibit share repurchases and dividends until September 2021. Delta said it reached a deal with the Treasury Department for $5.4 billion, including a 10-year, $1.6 billion unsecured loan, and the airline will give warrants to acquire around 1% of the Delta stock. So a lot of this are grants, some of it are loans. This seems like the government got the short end of the stick. Yeah. Couldn't they have walked away with like 10% of the equity here or something? And again, I have a feeling these companies are going to be coming back for more and hopefully at that point, then they tell them, all right, we need to get a little tougher with this. Maybe because this was just the panic situation, they didn't really think about it. They just said, let's get this money out. They didn't put some stringent rules on it. So I have a feeling the fiscal packages are going to have to continue to come. If they stop it now, it's not going to help.

So again, American Airlines got $5.8 billion. Four point one of it was a grant. only 1.7 was a loan and it's at very low interest rates. Again, I understand why people are pissed off about this. Should the airlines be bailed out so that 750,000 people continue to get paid? Yeah, I think so. If they're giving them loans at like 50 basis points or 1%. If they can't pay those loans off, then they're probably not fit to be run as a company anyway, right? But it's a $4.1 billion, just here you go. That sounds like bullshit to me. And I understand why people are pissed off. Yeah. But honestly, on the other hand, this is not the their fault. The government is literally shutting stuff down and putting restrictions on them. So

it's tough, but that's why if they're going to make this money available, make it available to more businesses and people and not just these huge businesses. I think that's the problem. They have to make it available. And if you have these gig economies who are one person is their own company, then you have to offer some assistance to them too. So I think it's just if you're going to do it for some, you have to do it for all, right? That's probably the part of the problem. But don't you understand the anger when that guy who's 52 years old says I have $45 left? Definitely. And then he sees American Airlines getting a $4.1 billion grant.

Don't you understand why people are so, so, so angry? Yeah, yeah, definitely. And again, a lot of this is going to be so unfair because no one asked for this. I think it's going to be tough all around. I don't know where. Again, this is why I think they need to offer more assistance just to straight individuals. And I'm sticking with my $10,000 50 basis point loan terms for any individual who wants it. All right.

So the New York Times had a story saying even Google and Facebook may face an ad slump. They're worried that they're going to see their revenue. People are saying maybe 20% down and these are some of the stronger companies, obviously. The thing is they're looking for them to potentially come out of this even stronger because they can withstand that type of downturn. A lot of these places can. So they talked about how United is pulling all its advertising because they had all these things ready for March Madness and the Masters. And Jay Yarrow had a tweet this morning from Barry Diller saying that Expedia spends usually

$5 billion in advertising a year. This year they're not going to spend even a billion. So obviously the advertising industry is really going to be in trouble. Seeing some of these bigger companies get in trouble, don't you think for another huge leg down in the stock market, we would need to see Apple and Amazon and Google and Facebook and Microsoft get hit really hard? Is that what it would take for people to go, oh, wow? because the top 10 companies make up like 25% of the S&P.

I looked at the other day. I think it's 36% for the top 20. Wouldn't we need those big companies? Amazon and Netflix were hitting new all-time highs this week because people are using their services more than ever. But wouldn't we need to see Apple take a huge hit and people go, whoa, this is way worse than we thought? Microsoft, Apple, and Amazon are 15% of the S&P 500.

Right. So I'm saying people who are predicting that we're going to go down 50% or 60%. aren't you essentially predicting that those companies are going to get hit really, really hard? I think people don't back out of their models what this means unless you think the rest of the market is just worthless. Because of the way the stock market is set up, these five to ten companies can probably prop up the S&P 500 from falling 50 or 60% if they're not going to fall that much. Well, Amazon's at an all-time high. So if you look at the difference, I'm just pointing up a chart now, if you look at the difference between like the S&P 500 and its equal weight counterpart, there is

is a fairly large spread, huge spread actually. So year to date, the S&P is down 13.3%. Equal weight is down 22.6%. That's a huge spread, huge in just four and a half months. It's another one of those trends that makes sense when you think about it, the fact that smaller companies would be hurt more by this and the fact that these big, huge tech companies have these enormous balance sheets and a lot of tech is being used more than ever these days. This is wild. In the last three years, The S&P 500 is up 20%. Equal weight is flat. Wow.

It's just all these big companies holding things up. And again, a lot of people thought that that was the biggest risk in the market. I just wonder if that's going to accelerate the almost monopolies that some of these companies have coming out of this. So Bill McBride had a piece about housing activity and he shared some anecdotes and also some data, just about how housing supply is just falling off a cliff. And so they looked at this is probably around you, I guess. there was 491 homes contracted for sale in Nassau and Suffolk counties in the first two weeks of April down 67% from the same period a year ago. In Chicago, single family home activity

fell from 318 last year to 172 this year, 46% drop. Condo and townhome activity fell 62%. So the real estate industry is feeling it. On the other hand, the Wall Street Journal had a piece saying that in Seattle, a city that's had a huge boom in real estate in recent years, the fact that this supply is going down has actually made bidding wars heat up. So they had this story about people trying to buy and their bidding wars and all cash offers because now there are actually fewer homes that are for sale. So obviously this probably can't or won't last, but the fact that fewer people are going to put their house in the market could actually prop up the real estate industry, even if it's like the private equity thing where you're just not looking at the real

value. So you and I were talking about this the other day, is this the type of economic crisis because it's so bizarre that the hope for some young people usually is, okay, we're going to go through a recession. It's going to be painful, but I'm going to be able to buy a cheaper house because of it. If that doesn't happen, isn't this like the worst economic crisis ever? Because you get all the bad stuff, but none of the good stuff, none of the advantages of being able to buy stocks when they're down 50% or buy housing when it's down 20% or whatever it is. Again, maybe those things still come. I'm just looking at the scenario where because this is such an odd duck of a economic crisis that that happens and people aren't able to get housing as cheap as they

would have thought. Yeah. And this is the thing that's so depressing about this. And I don't want to harp on this. I think this is the best time to be alive. Nobody would want to go back to any other period in history. But the anger is going to continue. And I don't want to say that I'm not like predicting, you know, a riot in the street, a crescendo or anything like that. I have no idea. I'm just saying that the political candidates that we have, Trump, Sanders, AOC, Elizabeth Warren, these are all manifestations of the anger. We're not going back to like a unified country. And I don't know that we ever were. So maybe it's sort of fantasy land that people think that we used to be like one nation for all.

But this divide and the anger is only going to be just heating up for the foreseeable future. Yeah, this is going to speed up that trend, if anything. It's not going to slow it down in unify us, unfortunately. yeah, that's tough. I mean, there was a protest in Michigan yesterday at the Capitol because people were mad that everything is shut down. And it's, again, I get why they're mad, but they're maybe mad. It's almost like with something like this, you're just looking for someone to blame because it's such a crappy situation for so many people that you want someone to blame. And it's not like a world war where you know your enemy. I mean, the virus is just,

it's not like it's this tangible thing that people can, we can go after. We can't go bomb the these people were standing at the state capital yesterday in Michigan with guns. What are you going to do to shoot the virus? I think that's what people wish they could do. And unfortunately, there's just no one to blame in this situation, but it's going to make a lot of trends from the past potentially sped up. Some are going to be good. I think on the science front, some are going to be bad in terms of people's anger about the economy and their place in it. Yeah. Okay. About 2 million homeowners are skipping their multi-mortgage payments. This comes from the Wall Street Journal. 3.74% of home loans are in forbearance, according to the Mortgage Bankers Association,

up from 2.73 in the prior week. I got to imagine this is the type of number that could and should be jumping. I wrote a piece yesterday on personal finance and said the list of things that you should be negotiating now, if you really are in dire financial straits and you can't, you really are having trouble making ends meet, even if you're getting a check from the government, you're having trouble. I mean, you rent to your mortgage. I would be calling up every day and trying to negotiate a lower payment, a lower interest rate, a forbearance for a few months. Credit cards, I would be calling up and asking for either a lower monthly payment, lower interest rate. I would say, stop charging me interest for three or four months. I'm not going to pay. Student loans are

already put on hold. I mean, car insurance. I've heard a number of car insurers that are offering rebates or discounts on monthly payments because guess what people aren't on the road. And I have heard that a number of them are actually falling through with this. But I know there's even car payments. So Ford is putting commercials on here saying, if you're having trouble making your new car payments, we're going to offer some delays or payment delays. And so I think if you're in that situation where you just can't make ends me right now, I would be calling up people in negotiating anything and everything that you can because I think a lot of places will actually work with you. This is why Congress Act, and they passed this $2 trillion stimulus package, which allowed homeowners

to request for bans from their banks, from the mortgage companies. So that means that they could suspend payments without penalty for as long as 12 months. So yeah, if you're in trouble, call up. It can't hurt. Yeah. So the other story in the journal, was that college students in some classes are actually filing a lawsuit. This is from Drexel and University of Miami that they say they want refunds because they're getting online classes and not what they paid for. I'm sure that the legal departments of the colleges will be able to snuff out these lawsuits, but it says that the total cost to attend either of these universities could be 70 grand a year. Obviously, that's not what everyone is paying. But I think

the college thing is going to be crazy to see what happens in the fall. And a lot of them may be in big time trouble, especially if football is not able to come back because a lot of get their money from college football, the biggest ones. But, I mean, if you were looking at going into college this year, whether you're a freshman or junior, senior, or whatever, would it not make sense to think about taking a year off? Would you really want to pay, take on 30 grand more in student loan debt for the opportunity to take online classes? How does that work? Are you allowed to like press pause and unenroll for a year? Why not, right? I mean, I'm not saying people should do this, but would you really feel, for me, 90% of the college experience was the experience, not the

classes. Obviously, you're there to learn, but it's more about networking and life and socializing and living on your own. And sitting at my desk at home, learning through an online course, is that worth that much money? So I don't know what these, a lot of these colleges are going to, if I was a kid, I would be really thinking hard about that's not worth it to me. So I don't know if that means you go to community college to knock off some of your electives or what. But, I mean, I think for a year or so, those colleges are going to be, people are going to have to make some tough decisions there. Yeah. So here, sticking with the anger for a minute, there was a story that, and admittedly, I'm sorry, they didn't get a chance to read this, but Harvard received $9 million.

Yeah, I read this. What's the upshot? The government said at least half of it has to be reserved for financial aid grants to students. So I think a lot of people are angry that a place like Harvard could get this money because they, before this, I don't know what it is now. They had a $39 million dollar endowment fund. And it's obviously not $39 million anymore. I don't know what it is or billion. It's, I don't know if it's $30 billion now after the losses. Still, they have a lot of money. So I think people are saying, why should a place like Harvard get these grants? This is just a tough situation because they're obviously hurting as much as anyone from this. But yeah, I think people look at this and say, why should the rich, one of the richest universities in the country

get a bailout like this? It doesn't make any sense. So there was a story. an institutional investor about the untimely tail hedge unwind of Calpers. So they had money in Universal, who we've been talking about. It's funny. Every time that place gets mentioned, they talk about how Talib, Nassim Talib, is an advisor, and they never really mentioned Spitzinagle, the guy that's running the fund. So it says that they were paying about five basis points as a tail risk insurance program that protected about $5 billion in assets, and they terminated the explicit tail risk hedging

option strategies because of their high cost and lack of scalability and the fact that they're better alternatives. When you say high cost, do you think they're talking about the five basis points or the fact that it has been underperforming for so long? I'm guessing it's the fact that they're a whatever $300 billion fund. So five basis points sounds like nothing, but out of $300 billion, that's a lot of dollars. So I'm sure they're looking at from a dollar perspective. This one hurts. I mean, because what did we say it was up? I just want to correct myself. I talked about the underperformance. I don't mean underperformance. I mean drag on returns, but that is the nature of these strategies. And this is a quote from the article from the CIA. At times like this,

we need to strongly resist resulting biases, looking at recent results and then using those results to judge the merits of a decision. Okay, that part I completely agree with, but I think this next part negates to what he just said. Tale risk hedging programs are similar to life insurance with tail hedges like any insurance policy investors pay a small amount each year, a sunk cost for a large potential payout if the event that is being insured against occurs. And this was the crux of the problem that CalPERS, according to sources. There was a lack of understanding of the cost and thinking of it as a management fee of sorts. CalPERS, quote, benchmark to the tail hedge program to the generic benchmark for the fund itself. It did not have a customized benchmark so the five

basis points becomes just another cost. Okay, that is lunacy. Right. So that's what a lot of these institutions, they get paid on how they do relative to their benchmark. And I'm sure that they were saying on the board, hey, look at this. We're losing money on this every single year against our benchmark. This is making it harder for us to underperform. Let's get rid of it. So yeah, they didn't. That's what I was saying. The reason that this is so hard to pay this insurance is because a lot of places don't put it in the correct perspective. Right. So it's not in the appropriate bucket. Like this says, I'm sort of a gas. Do you think that this is going to be a larger part of people's portfolios going forward? No. Unfortunately, probably not because this is exactly what

people did after 2008, all of 2009 and 2010, every institutional conference for endowments and foundations I went to, they would talk about tail risk hedging strategies. And 2011, 2012, 2013 especially, no one talked about those at all. And I'm sure a lot of people just completely got rid of them. And 10 or 11 years later, I'm sure it was hard for people to pay that insurance because, again, they weren't setting the right expectations. And I think benchmarking in this space is such a hindrance to these places because they're not only benchmarking themselves to these internally created benchmarks, which are a lot of BS in a lot of ways because they try to make them easy enough to beat so they can earn their bonuses. But they're also benchmarking themselves

of the performance of other funds instead of looking at what are our risks and does it make sense for our own personal risks to have this hedge on? And again, maybe it didn't, but it sounds like the way that they're thinking about this is just totally backwards for the reason they had it on in the first place. So Universal said that for a hypothetical portfolio, they show their clients. Listen, you have 97% of the money in the S&P 500 or stocks, whatever, and give us 3% and you're good. We got you back. But to your point, after paying the insurance premium, you know what's funny about these things, why they're so hard. Nobody wants to collect in your insurance. Nobody wants your house to burn down. So after a while, you're like, why am I still paying

this? So I totally get it. It's just unfortunate timing, I guess. So there was some tweets going yesterday that the small business aid program is set to run out of money yesterday. And someone tweeted that the SBA said as a 415 today, which was on Wednesday afternoon, that they were reporting that over 1.4 million applications were approved totaling $308 billion using over 4,900 lending institutions. This is actually impressive with me. As much as people want to hate on some of these programs and say how clunky they've been, to be able to pull that out of thin air and do it in, I don't know a month maybe. I think that's actually relatively impressive. And people were saying the SBA is going to be screwed here. They don't have enough employees. And obviously, I'm hoping they're going to

refill the coffers on this and do it again because that's impressive, right? Yeah, I agree. And Walter Bloomberg at Delta One tweeted they ran out of money. So there's going to need to be a lot more of this. Yeah. This is like a double edge sort of. It's a good thing these places are getting money. It's a bad thing. They need it, unfortunately. But I really hope that they refill this and let's do it again. these places are going to need it. Let me ask you a question. So small businesses are the biggest employees in America. Is that right what I just said? I think it is. I think the numbers work like 60%. It sounds about right. So the government is giving unemployment insurance. They're given the $500 per kid. They're given the extra $600 a week or whatever it is. By taking care of the

businesses, are they also de facto helping the individuals? Yes, because again, they're putting some restrictions on, this has to be used for payroll and you can't fire an employee for, what is it, eight weeks or whatever it is. So, yes, there is actually, this is, people always say trickle down economics doesn't work. This is hopefully a case where it is trickling down and they're able to keep people on and then keep them having benefits and that sort of thing. So honestly, I think without this stuff, you probably would be seeing more people file for unemployment because I think they are helping in a lot of ways. I figure out where the numbers were, we broke down George Parks last week or a few weeks ago, gave a breakdown on where the

money is going. And it looks like the individual is being taken care of this time. And I know we already spoke about the airlines. But I think the individual and small business are getting more money than the corporations this time, which is the way it should be. Right. Again, for a lot of people, if your income is gone to nothing, you think, okay, this just keeps me where I was. It doesn't put me ahead, which of course is the point, I guess. But it's for. So this is so weird. I mean, you see the market going higher and higher. We're 30% off the lows. What was the stat where it was the greatest 15-day period since 1933. So there's cognitive dissonance going on inside my brain for sure.

On the one hand, I'm saying the market is a forward-looking indicator. On the other hand, does it not see what's going on today? Hard to square these circles. So weird things are going on to the market. So Netflix just passed Disney and streaming gets up 109% year-over-year. Okay, I get it, but I don't get it. I don't understand how Netflix is worth more than Disney. I'm not even looking at the financials.

and I know Disney makes a ton more money. Netflix, I think, still has negative free cash flow. So forget about the fundamentals. I'm just like, in what world does that make sense that Netflix is big in the Disney? You know the part in Forrest Gump where he runs across the country and all those people start following him? And then in the middle of the desert, he decides he's going to stop and go home. And all the people go, what are we supposed to do now?

Don't you think there's going to be a lot of companies like that that are going to be like the people in Forrest Gump that go, well, now what? Like when this is over? And they go, are you still going to be a huge part? part of our lives? Or are you not? Again, I talked about Zoom before me. I'm probably totally wrong about that. But I wonder how much overreaction there is for some of these companies that are doing well. Or is it going to be a trend that gets accelerated? So companies like Slack and Peloton and Zoom and a lot of these companies that have done fairly well in the stock market this year, is this

change going to be enough to make those trends stick permanently? Or is this a thing that is like an 18-month story or 24-month story? And then people pull back and then you go, oh, wait a minute, that stock is way overvalued. Obviously, I don't know the answer to those questions, but it is interesting. There's other stocks that Netflix passed, and I know one has something to do with the other. It's just, again, just wild to think about it. Netflix has a higher market cap than Cisco and Exxon, which were once both more than $500 billion. Like Netflix is worth more than Exxon. I say this is a joke, but let that sink in. Well, oil is going to go negative, apparently. So maybe in this world, this does make sense.

What would you rather have 50 barrels of oil in your backyard or a Netflix subscription right now? I would rather have a Netflix subscription. Wisenthal tweeted this chart. This is from a Bank of America, I guess a fund manager survey. It shows extreme investor pessimism. Cash levels jumped at 5.9%, which is the highest level since 9-11 terrorist attacks. And I think there was a Balchunis tweet somewhere about the massive outfirm. that we've seen. Just absolute investor panic. From everything? So you see that and then you see stocks

come up 30 percent and you're like, I don't know. Okay, right. So unless it is everyone covering their shorts, who's buying here then? The Fed. A lot of these statistics about inflows and outflows are contradictory in many ways and it depends where you're looking, I suppose. By the way, so the stock market is opening in 25 minutes. Futures are up slightly. So this could potentially be what the third or fourth week in a row where we have five or six million people that show up in the jobless claims and the stock market is up again more confusion for your brain on this stuff i suppose so the new york times had a piece on how this is changing our spending and it's kind of what you'd expect everything else besides groceries has gone down shopping travel entertainment health

and beauty you posted some questions in here what happens to taxis it does seem like that's something that it's just i don't know what they're doing right now i finally broke down and joined your club and bought a Peloton because I cannot see myself going to the gym for the foreseeable future. That sounds like one of the last places that like gyms and restaurants for a sit down meal and maybe an airplane. Those are probably the three last things in line for me to be doing. So I actually Peloton still had their zero percent deal for 39 months. So I hopped on that and got one because I can't see myself going to the gym. Don't you think a lot of those are in big time trouble? I think gyms are in big time trouble. And so I forget the number that I gave.

taxi spending is down basically 100%. And this is what Uber did to taxis is what the coronavirus did to basically everything. So there are almost 14,000 medallion holders, taxis in New York City. What happens to them? It's just really beyond, beyond awful. So Balchunas tweeted Schwab saw a 268% jump in daily average trades on their platform in Q1. Okay. So people are taking advantage of the free trades and going bonkers with this. 268%. Yeah. I'm not surprised, right?

When this happens, people... That's a lot of alpha. People are panic buying and panic selling. It makes sense. Are you having weird dreams? Definitely. You are? Yes.

I've seen a lot of people mention that. Oh, yeah. Very weird, vivid. So three weeks ago, I'm not going to get specific because it was... Don't be the guy who tells us about your dreams. I'm not going... No one wants to hear it. I'm sorry.

Excuse me. I would rather hear about your fantasy football team that's not. I was just saying I'm not going to tell you. You don't have to try to embarrass me. This is not a time for dunking. This is not a time to come together. That's true. I was trying to make things normal for once again, you know, not just all doom and gloom.

So according to the article, why am I having weird dreams lately has quadrupled in the United States in the past week. And it looks like. On Google? I guess so. It looks like they're not exactly sure. Maybe it's just longer sleep. A person who sleeps more is more likely to have longer, more vibrant dreams. I guess I'm sleeping more, I guess.

I'm sleeping less, so that's not the answer for me. Okay, then forget that. I think it's maybe because stress and so I talked with this before and Jason Zwegg's book your money in your brain, he talks about how financial losses can actually lead to nightmares in your dreams about losing money. I think a lot of it probably has to do with people are just more stressed out and anxious right now. Yeah.

Because it's like the fear center of your brain is just rapidly going off all the time. That's the same place where dreams come from. We're going a little late. Let's just get to two questions. Okay. For how long can the Fed and fiscal policy continue to backstop things? How many more bazookas does the Fed have left? I think what they've shown, because people have been saying they've been out of ammo since, I don't know, 2009 now, they have a lot left in the tank.

You know when you're at an arcade and you're shooting the gun and you reload, you shoot off screen or you press your toe against the button, that's the Fed ammo. It's unlimited. Until like the market, quote unquote, whatever that mean, takes it away from them. interest rates go through the roof and the dollar stops being the global reserve currency, I think the Fed has the green light to, they can keep pumping this stuff in. And I think if you would have told people 10 or 15 years ago that the Fed was doing this, they would have thought you're crazy. There's no way they could.

And they haven't even brought out the tanks yet, I think. I'm sure that they're priming stuff just in case, but they have plenty of ammo left. Does the possibility of significant inflation change your asset allocation strategy? What instruments will use to preserve your purchasing power? What are your experiences with bonds and tips? please speculate whether inflation will pick up after this. Okay, so we spoke about this earlier, but I think that if the Fed doing what they did in the aftermath of the GFC didn't cause inflation, there's no reason to think that them doing the same thing would. Here's a scenario where I think inflation can pick up, but I don't necessarily think that this is going to happen.

But if the economy comes back and the consumer comes back, but the supply chains don't necessarily. And in that case, there is too much money chasing too few goods. Maybe that can cause inflation. But again, look at spending. And I know it's shut down. But look at energy prices. What people don't realize in the 70s is that wages were going up with inflation as well. Like wages went up like crazy during the 70s.

So yes, you had inflation and prices are growing higher. But people were also making way more money back then. And can you really see that happening after this where people's wages just go through the roof? So there was two real big spikes in inflation since World War II. It was after World War II. Which had only happened for like a year pretty much. I think inflation rose like 15 or 20 percent and then it leveled out. In the 70s. And think about what happened. Oil prices quadrupled in a very short period of time. So is inflation a risk? Yeah, it's always a risk. That's why we invest in the first place because we know that inflation is guaranteed to occur at some rate and our purchasing power is going to decrease over time if we just put our money under the pillow. So there's always things that you can look to like gold, which I don't know if gold is the best inflation hedge. I guess maybe in inflationary shocks it would be or tips.

Does Ethereum hedge inflation? By the way, so do you think that the perma bears, they went to hyperinflation after the 2008 crisis that didn't happen? Are the predictions going to be hyper deflation this time? I don't think so. Is that what people are going to be predicting? I don't think it works like that. But so, yeah, there's things that you can do to protect yourself from your portfolio against inflation. Yeah, tips are one of the realest of real assets. that there is. So tips are one of the most unique assets there are that you have direct inflation protection, even if you're not getting much of a yield. Whenever you're trying to protect yourself

from one risk, you always have to think about the unintended consequences and the other risk that you're allowing to creep into your portfolio when you try and trade one risk for another. All right, recommendations. What do you got? Not much. I watched the first two seasons of Better Call Saul just because I loved Breaking Bad and it was just so boring. And I saw a lot of people say, oh, season five finally heats up a little bit, and it's getting really good. And so I tried to catch up on season three, and it was so boring again. And so I just watched the finale. And then I tried to catch up on season four, and I think I'm just going to skip the finale again. They're bringing in some of the old characters, but the fact that they stretch this thing out for five seasons is kind

of ridiculous to me. It probably could have been a one season show just to bring him with the speed and how he got there. But I think people are probably just giving that one the benefit that out because they liked Breaking Bad, not because it's good. I also watched hit and run on Netflix, which is a movie Dex Shepard did. And he did this a few years ago. He talked about on his podcast, so he spent like a million bucks on it. It's not a great movie, but it's kind of a good car chase movie. And actually, Bradley Cooper plays the bad guy. He has like dreadlocks. And I think they became buddies because Dex said he spent a million dollars making this himself. Kristen Bell plays his girlfriend in it. It's not great, but it's a good kind of take your mind off,

action flick, car chase, comedic relief. That's not a bad movie. It's on Netflix. So I did watch talented Mr. Ripley, and excellent movie. Don't you think the ending kind of stretched a little bit, but it was still an amazing movie? Yeah, the first half was definitely better than the second half, and there's definitely some fat in there they could have cut. But why did I not see this movie when it came out? Because I was 14 years old, and this is not a movie that a 14 year old wants to see. So the cast was insane. It was Matt Damon, Jude Law, Philip Seymour Hoffman, Kate Blanchett, and Gwyneth Paltrow, all as young actors and actresses. So I watched the movie, and then I took Kobe for a long walk, and I listened to the rewatchables. And you ever put together a desk from

IKEA? Yes. I put together, well, not from IKEA, but I put together a desk the other day in my house. You know, there's the screws on the side that you give like a half turn and they lock it in. And they never work. Well, they work. So I feel like- I always fall out. Yeah, okay. That's what listening to the rewatchables is for my moviegoing experience. It really locks on the experience. So one of the things that they said that was just pretty wild. Matt Damon did talented Mr. Ripley goodwill hunting and rounders in like a 12 month period I think. Wow. Yeah. That was like peak late 90s, Damon. That's pretty good. One last thing that I didn't mention. This is not a recommendation, just an observation. I had to go to the dump because they're not picking up

recycling anymore. Oh, really? Yeah. So that's kind of annoying. But so I did that and it was kind of weird to see McDonald's and Wendy's had lines out like into the street. Oh, really? Yeah. I guess that makes sense, though. Do you feel comfortable doing that or not? Doing what exactly? Drive-thru? I don't know. I mean, I'm ordering groceries, so I don't know what's the difference. I've done the Chick-fil-A drive-thru a couple times. They have it pretty good. Everyone's wearing masks. They hand it to you in a plastic tray. They only allow you to pay through the

apps. You're not handing them a credit card. They've thought about it pretty good, actually. All right. I don't know. Everything's so weird right now. Thank you for listening. Animal Spiritspot at gmail.com. And we will see you next. week.