Money Rehab with Nicole Lapin - SLUGs, Car Prices, and Good Inflation News

Episode Date: May 24, 2023

Nicole gives her weekly pulse check on Wall Street. Today: SLUGs (but not the slimy kind), the confusing story on car pricing trends and, dare we say, good inflation news.

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Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Here's your weekly roundup of the headlines that are affecting you and your finances. As I record this, the debt ceiling debate has not been resolved. Generally, I try to be pretty chill about market fluctuations and

recessions. I mean, I'm a millennial, right? If I weren't living through some sort of once-in-a-lifetime recession, pandemic, or wildfire season, we probably wouldn't even know what to do with ourselves. I mean, I started working smack dab in the middle of the Great Recession. Fun fact, my first business was called Recessionista, so I know that bad times don't last forever. But until resolution comes, this debt ceiling debate thing, it sucks. It feels like our leaders are the parents driving the economy and threatening to turn that car around if we don't stop fighting in the backseat. And the whole country is there in the backseat saying, we're not fighting, we're not fighting.

I still have a lot of hope that our leadership won't drive the family car into the ground, if only out of self-interest. But this situation is not ideal, and it makes me worry about deeper issues here, that politics are so bad that we can't agree on our own national budget. I really want to zero in today on two little stories that are part of a larger picture. And sometimes looking at these little details can really help us get a sense of the larger story. So first up, I want to talk about a little piece of the bigger debt ceiling puzzle. Slugs. Not the slimy kind. Slugs stand for state and local government securities. and local government securities. So the actual abbreviation is SLGS, but when you say it out loud, you say slugs, which is kind of gross, but whatever. We've talked a lot on the show about

different types of U.S. treasuries. Bonds, bills, notes are all types of marketable securities that you can buy and trade. We've also talked about non-marketable securities like the series I-bond, which you buy and hold until maturity. Those are ways the federal government can fund itself without raising taxes. You lend them money and they pay you interest for taking on the risk. But those aren't the only types of treasures that the government sells. And you, as a private person, don't actually have access to all of them, which is how we get to slugs. These are a type of treasury only available to state and local governments.

There are a lot of rules about what state and local governments can do with their money. Obviously, you don't want your city to just hand over all of its funds to Bob, the investor. The local government must have enough cash on hand to meet their basic budgetary needs. Beyond that, while Bob could be a very careful money manager, he could also spend the city's money on a yellow Lambo with a matching buttercup Birkin bag, and nobody wants that. So local governments are legally required to be very, very careful with their money. This is true of the profit made from the sale of bonds. If a state or local government has extra cash as a result of the sale of tax-exempt bonds, they are forbidden to give it to Bob the

investor to invest for them. These come in two types. Demand deposits, think money market style assets, and fixed deposits, think traditional bonds. Let's say your city is going to build a bridge. The government has budgeted the money, collected taxes, sold some bonds, and made a little profit. But they haven't started that project yet. Your city will use slugs to invest their money for the project. Or they normally would. Right now, the slugs window, that's the name for the federal office that issues slugs, is closed. Now, this has happened before because it's a way for the federal government to reduce its debt obligations. In the past, they have honored slugs that have

matured during the time they were closed when they reopened, but it's not guaranteed. You might be wondering, Lapin, why do you keep talking about slugs? I can't buy or sell them to make profits, so why should I care? Well, because it's your money. It's your bridge. The more difficult this kind of financial transaction is for cities and states, the more likely they are to delay that bridge project or seek other more reliable forms of funding, like taxing you. The slug window is just one more cost of the debt ceiling standoff. And no, I have never said slug so many times in one sentence in my life, and I hope I don't ever

have to again. But it's important because we have the debt ceiling issue dragging the economy down at the same time that the Fed is trying to fight inflation without crashing the economy. That is not easy, especially since they only have one tool, interest rate hikes. Now, I know it doesn't feel like it when we're standing in line for groceries, but inflation is easing. It hasn't, though, gone away as fast as the Fed or all of us would like. And just as we looked at one little impact of the debt ceiling, now let's take a look at one little part of the inflation story, the price of cars. Now, to quickly recap, pre-pandemic car makers produced way more cars than the market really needed. Car dealers made their profits in two ways, by volume, meaning the number of cars sold,

or from the interest and fees on financing deals. But then the pandemic hit and factories shut down and no one could find enough semiconductors, which resulted in a low supply of new cars. This meant that dealers could charge a lot more. Now, instead of making their profit off volume, they were able to mark up the price of cars by a serious amount. I know this firsthand. Dealer markets could make up as much as 62% of new car prices through 2022. And that was the new normal for a while. But not anymore. Production is back to normal and many dealers are fully stocked again. Some are even overstocked. And yet car prices aren't dropping very quickly. Except Tesla. Sorry, guys. But for everyone else, what gives? The law of supply and demand teaches us that if there's a greater supply of something, then the price should be falling.

Prices are down from last year. I mean, it's no longer normal to pay thousands of dollars over MSRP. This means that dealers are back to trying to make their profit on volume. Dealers also borrow the money they use to pay for cars on their lot through what's called a floor plan. Because of higher interest rates, having a fully stocked lot is costing dealers a lot more than it did a year ago. So dealers want to get cars off their lots so they can stop paying interest on them and at a high volume so they can make a profit. To do that, they need to be able to offer incentives and discounts. But automakers who have a lot of control over pricing aren't allowing dealers to do that. As a result,

the price of cars has stayed relatively high despite a far more robust supply. Now, unlike slugs, I'm sure we can all see how car pricing impacts us, but it has a larger unintended consequence. Car prices factor heavily into how the Consumer Price Index report is calculated. Now, April's numbers are a bit unusual. After months of very low, but steady, inflation, new vehicle pricing fell slightly, real slightly here, like 0.2% slightly. That could be a sign that the rules of supply and demand are finally in effect again, but out of nowhere, the price of used cars, which had been steadily falling about 2% a month for the

last six months, popped up with an increase of 4.4%. This was enough of a bump that it had an oversized impact on the overall CPI numbers. One other interesting thing the story illustrates beyond the fact that inflation is difficult to bring down is that raising interest rates is working. Buyers want cheaper cars because rising interest rates are making loans more expensive and dealers want to drop prices to sell more cars because higher interest rates are making it more expensive for them to have a lot of cars on their lots. The buyer and the seller both want a cheaper product or a product with less of an inflated price as a result of interest rate hikes. The sticking point here is the manufacturer, who is somewhat removed from the interest rate problem and thus still trying to sell cars for

as much money as possible. For today's tip, you can take straight to the bank. When you're buying a used car, take the shortest loan possible and make as large a down payment as you can. Home loans tell a better story than car loans because you have a shot that your house will appreciate or be worth more by the time your mortgage is up. Because of the interest you pay on your mortgage, you're going to pay a lot more than up. Because of the interest you pay on your mortgage, you're gonna pay a lot more

than the actual price of the house, yet you're hoping the value of the house goes up. But cars depreciate or lose value the moment you drive them off the lot. And if you take a car loan, that means you end up paying a lot more than the price of the car because of interest. And in the end, the car is worth far less

than what you paid. And that is not a good deal, no matter what the interest rate is. I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high-quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations,

messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work. But sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do.

So email us your money questions, moneyrehabatmoneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.