Money Rehab with Nicole Lapin - Are We Back to 2008?

Episode Date: June 29, 2022

Earlier this week, Nicole laid out why she thinks we’re in a recession. But does that automatically mean we’re doomed to repeat the same patterns of 2008? Not necessarily. Nicole is joined by Gary Kaminsky, finance industry veteran, to talk about what we can expect this recession to look like, oil prices, and the beautiful force of compounding interest. 

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. On Monday, I told you that I think we're in a recession.

But does that automatically mean we're doomed to repeat the same patterns of 2008? Not necessarily. Today, I'm bringing you a conversation with finance industry veteran Gary Kaminsky. We caught up behind the scenes at the FounderMaid conference. So yes, heads up, you may hear some badass founder folks talking in the background. Gary and I go way back. We were at CNBC at the same time. He was CNBC's capital markets editor, and he was also the co-creator and co-host of

Strategy Session. But that's just the tip of the iceberg with him. He's also been a suit. He worked on Wall Street as an analyst. He led a team at Neuberger Berman. He was the vice chairman of Morgan Stanley Wealth Management. So let's just say he knows his stuff. I invited him on the show to talk about what the recession will look like. But as it happens with old friends, we ended up covering a lot of ground. In this interview, we talk about oil prices, best investing practices, and the beautiful, beautiful force of compound interest. Here's our conversation.

But here's the bigger question. There's a lot of comparison between what's going on with the economy and the market now and 08. Is that a fair comparison or is it a better comparison to talk about 01? Because in 08, like the plumbing of the whole system was fucked. That's not the case right now. I think you can compare what's happening right now to both periods. Most likely the scenario in terms of the publicly traded equity markets and what's happening is very similar to a March of 2000, where you had crazy valuations going into the tech bubble. You had the Fed, obviously in a different mode, but in the mode of wanting to

wring out speculation. And you had all stocks- Which means what? Wring out speculation like raising rates? Well, at that time, it wasn't necessarily to stop inflation. Today, we're trying to ring out speculation for two things. Number one, by raising rates to get speculation, prices down of various assets, which help create the wealth effect, which inflation wasn't a major issue

in 2000. So we did have two big financial buildups, the 2000 period, as well as the 2000 period, where there wasn't a tremendous amount of inflation. What's happened now because of a couple of things. COVID created massive stimulation. People got the checks, people got the loans. There was government programs that had to be put into place to keep the economy alive. At the same time, you had supply chain constraints that are still happening right now coming out of China, coming out of the Far East. And then you've also got this craziness that's going on with the oil markets, which may or may not have happened. We'll talk about that because I do have some strong opinions. It's not all just about, sorry,

Joe Biden. It's not just about what's happening in Ukraine. We could get into that. So we are in a period right now, similar to 2000, where the central bank wants to wring out speculation. But we're also like a period of 2007, 2008 where we don't know exactly what the other side of tightening interest rates is going to look like. Powell was actually speaking in front of the House this morning, and I caught some of that commentary. To say that what they're doing now could very easily or very likely cause a recession is very strange in a political world. You never want to basically say to the American public what we're doing has a high probability of causing recession. Well, your homie Gorman just said it was 50-50. Well, I think most people think it's greater than 50.

You know, you ask me the problem. I mean, I say it's 100%. I agree. You know, we are going to 100% shrink this economy now in order to try to turn around inflation. order to try to turn around inflation. And so I think we're in a similar period to both 2000 from the public equity markets. And when a period similar to 2007, 8, like you said, the plumbing, I don't see it necessarily like we're not going to have a financial crisis. But what we are going to have is something that we don't know what it's going to look like on the other side. We don't know if trying to force the economy to stop and shrink is going to have a

domino effect on certain things. We've seen it. I mentioned crypto early. We've seen it, obviously, in what's happened with the crypto markets. We've seen it in the high technology, high multiple technology stocks. Well, that's like 01 and a bunch of wealth there or a bunch of paper billionaires are going away. Yeah. Well, the wealth that's been taken out of the public markets, dollar to dollar, obviously, we're talking now 22 years later. So you've got natural embedded inflation. But the drawdown from the top to where we are today, in terms of the money that's been taken out of the system, the wealth creation is dramatically greater than both

periods already. But it hasn't had any impact on what we see right now. It hasn't had any impact, surprisingly, on the inflation data. And we're all feeling it at the pump. So tell me your hot take on oil. Well, listen, this is a very controversial subject because of everything that's happened with ESG. Do I need to explain ESG or the audience knows obviously the move? I love a good alphabet soup. So there's been a tremendous amount of corporate pressure, you know, on the businesses that create oil to move towards a green, let's call it a green economy. Well, it's not just green. It's also like governance and having women involved. Right, but I'm talking about it relates to oil.

So, yes, ESG is about environment, sustainability, corporate governance. It's about companies. My simple terminology for it, Nicole, is that it's about companies not just being in the business for profits. It's for companies, I think, in a more general sense. It's for companies also adding to society, which, by the way, I don't have a problem with. I hope you wouldn't, Gary.

You're a good man. Of course. Of course. I hope you wouldn't, Gary. You're a good man. Of course, of course. But, you know, every public company has been grappling with the idea of how to implement it. Well, as it relates to the environment and to the oil companies, we've had a couple of things happening. You know, we'd love to have everybody in an electric car, but an electric car is not affordable for everybody.

And we don't have the production to put everybody in an electric car anyhow. So we've got two things happening simultaneous. We've got a transition. I think I saw something, motor vehicle registrations year to date. I saw the stat today. It's a good timing. 5% of new car DMV registrations were electric, hybrid. So you still have 95% of new car DMV registrations in the last six months are fossil fuel. At the same time, we're trying to tell the large energy companies that we want them to use their shareholder capital to buy back stock, to pay dividends, and to invest in environmentally friendly solar and wind. And that all makes sense. But at the same time, we disincentivized the oil companies in the last three or four years

to move away from more exploration at a time where, yes, we did not know Putin was going to invade Ukraine. And as a result of that, natural gas and crude oil was going to have a dramatic rise. But at the same time that this is happening, we've now created a culture where we don't want more exploration. We don't want fracking. We don't want more crude, dirty crude coming down to the refineries from Canada where we could have built a pipeline. But we also want low gas prices. Exactly. We want all of it. So we're in a very, not to sound completely negative and terrible, we're in a really difficult time right now. We've got oil prices, which the Fed can't do anything about. The only thing the Fed can do is they could create a scenario where if oil prices stay high,

they create less demand because people have got to pay more for their mortgages. They've got to pay more for their credit card balances. And as a result, they're not going to have as much money. And so you're going to start to see demand destruction. That's the only thing the Fed can do related to oil. And the only thing Fed can do related to food prices is the same thing. Make you spend money on other things that are interest rates sensitive so that you can, you have to go, you're not going to be able to go out to dinner as much. And that has a domino effect. The restaurants, which had a terrible time running their businesses

in COVID, have just had a, have just finally started to get back to normal levels. And now they might start to see as what happens with typical recessions, people stop coming as much because they can't afford it. So it's a difficult time we're entering. Hold on to your wallets, boys and girls. Money rehab will be right back. Now for some more money rehab. What do you think is going to happen with gas prices? And what do you think about the energy sector? Like XLE, we talked with your friend, Guy Adami about that. I think that, you know, as an investor, you may remember, I'm somewhat of a contrarian. And so what we've had the last couple of days, actually, after a lot of market, what do they call them? Market prognosticators had said oil will not go down. Some famous ones said that recently.

Of course, oil topped up and oils actually declined almost about 18% the crude oil in the last couple of days. And a lot of that has to do with the fact that the market, which always looks forward, is now not so focused on the supply issue, but much more on the demand destruction. supply issue, but much more on the demand destruction. And so, you know, I've recently talked to Mark Fisher, a friend of mine, a well-known commodity trader, probably the biggest oil trader in the world at some point. I think he agrees with me, Fish, that oil could easily be in a band. We could be down 20% from here a month from now. Certainly, if there's any settlement, I can tell you one thing for sure. If there's any kind of settlement or any kind of peace talks or any kind of withdrawal out of Ukraine, you'll probably see a collapse in the oil prices because there's so much speculative money in the commodity.

So the first sign of any type of peace agreement, if Emmanuel Macron, I'm going to do my French accent, Emmanuel Macron is able to create any kind of... He's under tremendous pressure, as you know, with the population of France to end this right now. You have the same thing in Germany. So anything like that, oil prices will come collapsing down. The Fed will look really good. They'll be very happy. But I can't predict that. As far as natural gas, which has also been a huge, for those that use natural gas for

their homes, either to cook or for heating of homes, that's been up actually on a percentage basis much more than crude oil. That's really more also the long-term supply demand. The natural gas pipelines between Russia and Eastern Europe now are shut. And so there's going to be a lot of supply problems continuing for natural gas, which won't correct as quickly as crude oil, which is more abundant, especially given that what can come out of the Middle East. So how does that trickle down to folks filling up their cars? So you want to know if you're going to be paying less or more 30 days from now? So what I will say is if I had to, in an absolute world, 30 days from now,

president will go over to Saudi Arabia. We know about this trip in July. He's going to try to make nice now with MBS. And so there'll be a lot of talking, a lot of discussion about how this is the top priority of the government. So as a result of that, 30 days from now, you'll be paying less of the pump, in my opinion. Plus, you'll get the demand destruction that the Fed wants. You texted me that the Fed is engineering a recession. Why do you think that? Oh, well, at least she read like an appropriate text, right? You were scared for a second.

Well, they are. I mean, that's what this is all about. As I mentioned earlier, the Fed has determined that both are bad. Both are certainly going to be bad for the midterm elections for the Democrats. And they've determined that inflation is worse in recession. But with the recession markers, we could be in a recession right now. We probably are. I agree with you. But we find out about GDP later.

And then the market, when you find out you're in a recession, tends to rally, right? Because it's like already done. Correct. And that's what's confusing to a lot of people. Yeah. So let's explain to people. Unpack it. Let's explain to people.

When they hear, when they listen to some of these commentators talking on business television and they're talking about, well, we'll probably be in a recession in the third quarter or the fourth quarter. The market is always anticipating in front of it. And, you know, what I've said, listening to people that are trying to determine, okay, when is it safe to go back in and buy stocks, which is sort of a silly question. Because if you're a long-term investor, which we can get to, my history has always shown that you use these opportunities to continue on your strategy. Yeah, dollar cost average. You don't change your strategy because of what's happening.

You have to stay steadfast. The power of compounding, which we can get into. Try to take the emotion out. And so I think so many people are focused on trying to make a determination that when – the consensus right now out there is that as soon as inflation, as reported by the CPI statistics by the government, as soon as inflation has peaked, the market will rally. My history, which is, how many years have I been doing this now? Probably close to 38 years investing. My history says that by the time-

Since you're in diapers. Oh, yes. Thank you so much. diapers. Oh, yes. Thank you so much. My point is that by the time CPI has tapped out and by the time inflation, when the headline stories in the general newspapers are inflation is coming down, the market will already at that point be 10, 15% off the bottom. And that's not to say, that's what people that are trying to time the market, which doesn't work. Let me ask you a question about compounding that I just mentioned this morning. If I said to you, if I said to you, Nicole, I'm going to give you $10,000 a day for 30

days just for smiling and showing up, or I'll give you a penny a day doubled for the next 30 days, which would you prefer? Well, I know the answer to this. Do you know what the numbers are though? No, not off the top of my head. And it's really, really important for the audience. But take that penny, baby. Yeah. Like my doggy's name. You'd be surprised how many people say they'd rather have the 300,000, the 10,000 a day for 30 days. So 10,000 a day for 30 days, 300,000. A penny a day doubled for the same 30 days is $5.6 million. That's the

power of compounding. And that's the key to equity investing. Because if I've learned one thing as an investor and my track record was better than average- You're being modest. You crushed it. Come on. We were in the very small percentage of active managers that beat index funds. Which is hard.com to do. Absolutely. And how many do it? Well, I think history would say something like 5% of active managers. Even though they put all this like reviews on Morningstar and whatever, whatever.

It's like not possible. Want to go inside baseball and talk about that? Yes, sure do. You will. But so remember, and it's the most important thing I was ever taught about investing, that 60%, close to two thirds of long-term returns in investing in stocks, and this is globally, is dividends and distributions that are reinvested, the power of compounding. You don't hear about that a lot because it's not sexy. It's much more exciting to talk about a stock that goes up 35% on a given day or, you know, you never hear about the stocks- Yeah, do you want to know why?

You never hear about the stocks that go down 50%. You know, Peloton is a perfect example, right? You heard about Peloton every day when it was going up in the pandemic, going up, going up. You know where that stock's trading now? $9. It's in the pooper. $9. And so are a lot of those pandemic hot girls at the stock market. But that's why people want a quick fix. And it's like the old dad joke, if you want to double your money quickly, just fold it in half. There's no easy, fast way to double your money, but that's what people want. Right. Well, if you, if you.

Instead, index funds and chill and dollar cost average and put your blinders on. And that to me is sexy, but yeah. Yeah. Well, I mean, depending on if you use the power of compounding to your favor and you stay invested, the long-term history, like hundred year history of equity investing is you double your money. You know, it's like sort of the history of equity investing is you double your money. It's like sort of the power of 10. If you take the historical rate of return- Or the role of 72. Yeah, the seven years. In seven years, compounding at 10%, you're going to double your money. 7.2 years.

Yeah. And so that's the important component to remember. And that's why I don't like people that say, oh, I love that the market's down because I'm buying things cheaper. Nobody likes that the stock market is down, you know, but the cycle works in your favor when you stay committed to investing in up markets and down markets. But things are on sale. And by the way, just because they're on sale doesn't mean you should buy them. That's correct. Just like if you go to TJ Maxx.

That's correct. I mean, the pandemic stocks, the darlings, as you call them, they were significantly overpriced. And everybody knew that they were overpriced. Netflix, Zoom, whatever. Because the idea was that the demand that was created by the pandemic was never going to change. And the management, a lot of these CEOs have lost their jobs. I mean, DocuSign comes to mind, Peloton comes to mind. I'm sure there's others because that's their job to figure out how to manage the businesses

through the cycles. But the point there is that those were never companies. Those were high growth, um, younger businesses that had not been able to be in a position to give shareholders big dividends and pay through the cycles. Because they're growth companies still. Because they were reinvesting their capital. In many cases, they were just starting to become profitable. And, um, it's important to remember that just in a diversified

portfolio, when we talked about active managers, it's so hard to beat the index. That's because if you look at most active managers, you may remember a phrase I coined back on CNBC back in our days together, closet indexing. And I got tremendous, tremendous hate mail, email, because I basically said, most people that are managing money for individuals are doing, they're basically just mimicking the index. And instead of charging eight basis points or something like that to go into a Vanguard index fund, they're charging you 1%, which is 10 times the same cost factor for the same thing. Basis points being 0.08. Correct. It's a lot over time. I mean, you think it's like,

oh, it's just like a few fractions of a percent or whatever. No, like over time, that's serious money. For today's tip, you can take straight to the bank. Do not let recession news send you into a panic. I keep ringing on experts and they just keep agreeing with me. You shouldn't get off the roller coaster in the middle of the ride and you definitely shouldn't liquidate your investments when the stock market dips. That's what the stock market does. Like Gary says, if you have a long time horizon, you should hold the course and keep your investing strategy the same. Your present self might wonder what the heck you're doing, but your future self will thank you. Money Rehab is a production of iHeartRadio.

I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.