Motley Fool Hidden Gems Investing - Former FDIC Chair on Crypto, The Fed, and Student Debt

Episode Date: July 12, 2022

Pepsi is not an obvious candidate if you're looking for companies with pricing power, but the latest quarter proves Pepsi's got it. (0:21) Asit Sharma discusses: - Pepsi's strong quarterly results in the face of inflation and other headwinds - Gatorade and Doritos helping to fuel better-than-expected profits - Why he's keeping a close eye on Etsy's upcoming earnings report (10:09) Robert Brokamp talks with former FDIC chair Sheila Bair about how students can get smarter about debt and one "stressful" economic problem catching her attention. Bonus resource - https://www.studentdebtsmarter.org Stocks mentioned: PEP, KO, KDP, ETSY, MS, GS Host: Chris Hill Guests: Asit Sharma, Robert Brokamp, Sheila Bair Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill, joined by Motley Fool Senior Analyst Asit Sharma. Thanks for being here. Chris, thank you for having me. Happy Prime Day. Don't remind me. I have to get some work done today. I can't be scrolling to see what deals are out there. I think there are some flat-screen TVs on deep discount on Amazon. But let's talk about Pepsi. The suddenly interesting Pepsi. Second quarter profits and revenue came in higher than expected. For the second quarter in a row, Pepsi raised guidance. And I say suddenly interesting because in a year where many stocks are down, Pepsi is holding steady. It is basically flat for the year, but that is well ahead of the S&P 500.

Yeah. I mean, flat for the year, you don't want your beverages to be flat. But in a year like this, if your stock is flat, that is spanking the market. PepsiCo here doing just what it's supposed to do, right? When markets are running hot, we forget about these big consumer goods conglomerates that promise to stay ahead of inflation by a couple of percentage points if they can do it. Usually, inflation is running two percentage points a year. If PepsiCo can grow its revenues by 4% to 5%, investors are happy. Here we have organic growth, which grew 13% in the second quarter. The company is promising that organic growth will be 10% the full year, year over year, that is going to likely outpace inflation. I hope we've

seen the worst of this inflationary spike. This company is really performing according to plan, even though it's an extremely difficult environment for any multinational that is running soft drinks, snacks, both the healthy and the indulgent variety across the globe. You got to give the management team credit, because you dig into these results, and what you realize is that they are doing a very effective job of, in some cases, taking a little bit of hit on the margin line, a little bit of margin compression, but they are also effectively dealing with inflation by raising the cost of some of their big winners like Gatorade and Doritos. I think they've pulled off this balancing act quite nicely.

If you think that can continue, this seems like one of those ballast type of stocks that could pay off in the long run. Yeah. Credit to CEO Ramon Laguarta, came in with this theme of faster, stronger, better, which sounds like a piece of electronica from the mid-aughts. However, it's been a good mantra to spread through the organization. He's focused on their direct store delivery model, which is in itself a supply chain exercise to improve. Did that well in advance of the world becoming so out of whack with geopolitical risk, climate change, COVID. The list is so long. But on the flip side, you have a consumer who really wants his or her snacks as they're used to seeing them in the grocery store,

in the convenience store. We're going to the pump, getting numbed by the price of gasoline, but still walking into that integrated display of PepsiCo products along with Frito-Lay products. You've got your Mountain Dew and Doritos in front of you. What we're finding out is that consumers are still picking up those snacks. You're absolutely right, Chris. It's a combination of some very efficient bottom-line movement automation, the use of analytics, the use of just extremely efficient routes in delivering to stores so they save on fuel, plus the ability to price in a little bit, to raise prices enough. We're still willing to shell it out, because in all honesty, who is going to give up their healthy or indulgent snacks?

That's what makes you get through a period like this, right? That's your comfort food. This is not one of those businesses that we think of when we think of businesses that have pricing power. We think of Apple and their ability to continually charge over $1,000 for a phone. We've talked on this show earlier in the year about Chipotle and their ability to pass on prices. I never think of Pepsi in that category, but once again, they've proven that not only do they have pricing power, they're smart about how they use it. Yes. They have worked with us for years under the cover of darkness to decrease the size of packaging. PepsiCo, Coca-Cola, and Piers, I would throw Keurig

Dr. Pepper in there as well, have trained us to go for smaller packaging sizes, smaller bottles of soft drinks, mini bottles, 7.5 ounces, or maybe those are milliliters. Well, the 7.5 size. I'll have to be honest here. Today, I am measurement challenged. The message of that story though is they pulled a lot of margin out of that exercise. And now when you bump up the price marginally on a smaller packaging, it's an even stronger exercise in pricing power, sort of invisible to us. The ingeniousness of how these major conglomerates have exercised their pricing power, I'm sure people will study for a long time, because it's so much more subtle than just the brute increases we're used to seeing on our Apple products, and we shell up for those as

Earnings season kicks off later this week. I'm going to ask you the same question I asked Jason Moser yesterday. Is there a company, and I know you follow a lot of companies, but is there one or two companies in particular that you're especially curious about this earnings season? Well, this is an embarrassment of riches in that category, Chris, because I'm curious about every last company I follow. it's such a weird time in the market and in the world. But we have to choose because we've got to make a call here. I'm going to say Etsy is one that's at the top of my list. The reason is, this is both a bellwether for platform businesses, if you're a fan or a student of those.

It's also something of a bellwether for the economy. Now, you and I love to look at companies that are in the manufacturing industry as these quiet indicators of where the economy is going. Here's something from the other side of the coin. This is a company which really tracks discretionary income. It tracks our ability, our need, our desire to pick up artisan goods in many cases. Etsy's ability to really stay, let's pick up from a metaphor we talked about in this first segment on Pepsi, to stay flat. In that, I'm talking about their gross merchandise sales, to keep that volume flat and not have it shrink, to keep new sellers coming into the marketplace, new buyers, is going to be a feat to pull off. I'm very curious to see

how well they'll be able to at least track along this flat baseline this year. I don't expect Etsy to surprise the market and say, guess what? We know inflation is high, but people are finding comfort in paying up for our rather higher-end goods. I don't expect that to happen. But I believe there is some momentum the marketplace has in its brand power and in the trends we've seen even last quarter, where it was able to hang on to a lot of pandemic gains. In a quarter, you would have thought it would have slipped significantly. I'm so curious about this one. As an Etsy shareholder, I am also looking forward to their report in early August, and hopefully the stock, which is down nearly

60% year-to-date response to some good news and hopefully some good guidance as well. Asit Sharma, always great talking to you. Thanks for being here. Thanks so much, Chris. We're about to help you get smarter about student debt, but first, a message from our friends at BiggerPockets. Real estate investing is one of the best ways to build long-term wealth. But to be a successful investor, you need to know what news and trends to pay attention to and what's just noise. I'm Dave Meyer, real estate investor and VP of analytics at BiggerPockets.

And in my new show, On the Market, a BiggerPockets podcast presented by Fundrise, we bring you expert perspectives in a digestible format so you can make informed investing decisions. And we make it fun. I promise you, On the Market is definitely not another boring news show. Each week, I chat with a panel of experts about the latest news and trends affecting the real estate investing world. We touch on things like government policy, 3D printed houses, investing in the metaverse, and more. So join us every Monday for On The Market, the podcast designed to help you invest with confidence. Just search On The Market in your favorite podcast app. That's On The Market. Sheila Baer ran the FDIC during the Great

recession. On two occasions, Forbes magazine named her as one of the most powerful women in the world. Robert Brokamp caught up with her to talk about how students can get smarter about debt and one economic problem that's caught her attention. Part of the problem, of course, is that the cost of college has gone up at a rate that's around twice the rate of inflation. A lot of theories for why that is. One is maybe the easy availability of debt. Uh, given your experience, are there any other reasons that strike you as a, as a cause for the higher prices? Well, there's not a lot of cost discipline. So, you know, you think, and people think it's faculty salaries. It's really not there's,

there's too many buildings, uh, administrative bloat. Uh, and, but I think that all stems from the lack of price discipline, which in turn stems from the lack of price transparency and competition and accountability for actually having a degree that's worth the money. It's very, very hard for students to get their arms around that. And the Department of Education has improved with much better disclosures about postgraduate income. And there's been a greater public awareness about that having a college degree isn't magically going to lead to all this extra money. It really depends a lot on where you go to school, especially what kind of degree you get in the job market. And that's really helping guide students to those kinds of decisions to make sure

that they're going to be able to afford their debt is really what student debt smarter is about. So I do think there are these other factors, but really almost all of them stem from the lack of cost discipline, which in turn stems from the lack of transparency around pricing and what you're actually getting when you get a college degree. Yeah. I'll just say as someone who's married to a college professor, it's definitely not the professor salaries that are causing. No, it's not. And I wish people would stop blaming professors. We should be spending more on them unless on all these administrating people. Yes, absolutely. So, so you've mentioned the student debt, smarter tool. It's at student debt, smarter.org, something you've helped develop with

the Peter G Peterson foundation. It's pretty easy to use. Tell us how it works. So, yeah, so it's basically four inputs. It's where you think you want to go to school, what you think you want to major in, uh, when you're going to start school and where you think you're going to live when you graduate. And those four factors really have the lion's share of impact in terms of how much data you can afford to repay once you graduate. So you can put in any combination. It's very easy. There's no data harvesting. Nobody's looking at your information, sharing your information. It's just for you, the student borrower and their families to put in these different inputs. And I think it encourages students to understand. It's a financial

education component to it because it helps students understand that the decisions they make will impact their capacity to repay debt when they graduate. Nobody's really telling them that right now, but these are important decisions that they need to factor into account. It also encourages students and their families to think holistically. So much of college financial aid now is it's like year by year, right? So really what's the total amount of debt? And it is also, if you're going to have to borrow with private loans, parent plus, you know, those that have a higher market rate than subsidized debt. It factors that into it, the higher rate. So what is the all-in cost going to be that's going to be affordable to you in terms of what

you're going to be able to comfortably repay when you graduate? And again, I don't think anybody these days is encouraging students and their families to think in that way. But this is another really valuable piece of information that students don't have now that I think they will find very, very valuable. It's a very dynamic tool. I mean, I used it, I put in my information, I went to Catholic University here in Washington, DC. I was an English major. I was a teacher in Washington as I graduated. So you put in the information, it tells your salary, which comes from the school via the department of education, because they provide that information of how much a median person who made it in that had that major from that school's making has cost of living,

even estimates taxes. Now the salary was probably lower than what a teacher makes. So I went back in and I put in educator and I thought, okay. And it adjusted. Um, and it moved up how much I can borrow from 32,000 to 36,000. But I had, because I was in DC, it was like, well, what if I moved back home to Tampa where the cost of living is lower? And then it said I could borrow a little bit more. And I thought it's that just, just that in itself is a handy way because this is geared towards high school students to understand how all these moving parts come together, where you pay this much to get this major and you want to live here these these are all the costs that are associated with that that's right that's right so yeah and it's and you can put in

as much different you know any combination of factors uh you don't need some of these other tools that are available now they ask for all this personal financial information you don't put anything in about that you know you got to have dreams of records and spreadsheets to use these tools it's just what's in your head what's in the student's head where do you think you might want to go to college? What do you think you might want to graduate in? Where do you think you might want to live? That's all you need. And you can put as many in as you want and see how they compare and how those decisions impact the affordability of your debt. Again, this is a unique tool. Nobody really out there is encouraging students and their families to think this way.

And I think it's going to be hugely helpful to them. Nowadays, there's a lot of talk about student debt. The amount of student debt has more than tripled since 2005 to where it's now $1.7 trillion, and then there's all this talk about student loan forgiveness. Do you have any opinion about what should be done about that? Yeah, well, this is a personal view. I am sympathetic to $10,000 of debt cancellation, at least for undergraduates. I think if you look at the analysis of who that benefits, that is the most progressive of the options. You're really helping a good chunk of those students who are in default, a good chunk of those students, first gens graduated with, you know, no debt and no degree. So they went to school, went to a bad

school, just weren't prepared, they borrowed, didn't get the degree, or they went to a poor quality school that didn't really give them income enhancing prospects. So it's a progressive impact. I think it would be irresponsible to do that and not have some reforms of the system too. I mean, you don't want to just get right back into the soup again, and you're going to, you know, encourage moral hazard by forgiving that and creating potential expectations that's going to happen again. And I must say, student debt's smarter. Look, I think everybody just, there's a lot of robust disagreement about the wisdom of student debt cancellation. But I think one thing we all agree with is for new borrowers coming into the system, let's make sure they don't

undertake unaffordable debt loads, which is really what student debt smarter is about. So, prospectively, I think this is a good piece of trying to solve this problem. For those who we've already taken on unaffordable debt levels. I do. I am sympathetic to $10,000 of debt cancellation. And since this often becomes a political discussion, I think it's, it's interesting to point out that you came to Washington as, uh, to work on Bob Dole's staff and you, you're, I think, consider yourself a pretty traditional conservative. I am, I am a, yes, I'm very traditional, uh, fiscal conservative Republic, you know, and, and with my family finances too, you know, my parents were depression era, uh, children and, uh, really instilled a fiscal

prudence. And I think that passed that onto my children too. And we saved money and we were, you know, I understand not all parents can do that, but you know, for parents who can't do have the capability, that is another way to minimize debt loads is to start, start when they're born, start saving, uh, put it in a five 29 or an, or a education account. That's another good way to, to reduce the need to borrow. Yeah. And by education account, I assume you mean the Coverdell, which I don't think gets enough attention these days. No, it doesn't. That's true. That's true. And banks will set them up too. It doesn't have to be a 529. That's right. There are different options.

So moving on from student debt and sort of hearkening back to your time as FDIC chair, you were early to see that there were problems in the housing and mortgage markets, and you're now a senior advisor to the Systemic Risk Council. So is there anything out there in the broader economy that's causing you any concerns? Interest rates, the great financial crisis, as well as the banking crisis of the 80s, those are all catalyzed by a rise in interest rate environment. So, people usually think, well, an interest rate goes up. Well, banks, that's a big benefit for them, right? They can charge more for their loans. But actually, it comes back to banks in a couple of ways. One, banks with large market exposures, like Morgan Stanley, Goldman Sachs,

you know, those big banks, the big money center banks, they have significant market exposures, they have clients to their private brokerage, they have big market exposures. So it's like Arthur Leavitt, excuse me, Warren Buffett says, when the tide starts going out, you find out who's swimming naked. And we've seen a few naked swimmers already. So I do worry that the Fed, in particular, through their stress testing, is not adequately focused on this. Their most recent stress tests assumed a deep recession. So they stressed bank balance sheets through that. But they also assume inflation would magically drop, and then interest rates would go back to zero. And Paul Volcker had to keep rates, keep money tight for two recessions before we finally got

it under control. So this idea that we could go into recession, somehow all these other problems are going to get magically fixed just isn't correct. So I do think it's called stagflation. We need to stress banks, these big banks, especially with market exposures through a stagflation environment where you can have double-digit employment, double-digit interest rates, double-digit country inflation, you know, it can all coexist for a time before it starts to correct. So I am worried about that. And I think as from a systemic level, I think that's, that's at the top of my list, um, from a, from an individual, uh, investor level, I worry about crypto. You know, we've seen a couple trillion dollars of wealth, uh, you know, wiped out

already. Some of that speculators, a lot of it because of our young people that, you know, the crypto industry really markets to young people. I hate it. Um, it's volatile. It's not, you know, but regular savings, put it in a, you know, a broad-based index fund and leave it, set up, forget it. Those are the ways to build well. And, uh, you know, I write money books for kids too. And one of the things I try to do with my money books, there's so much literature out there about, Oh, here's, here's how to get rich. Here's how to invest in the stock market. Here's how to take out a loan. Here's how to get a credit card, all that stuff. I try to write books about how not to lose your money. Right. So you can buy these get rich quick books, but you know,

most people they just want financial security they don't really you know they're they may be smart enough to listen to motley fool if they are in there in the investing game and good for them they should be doing the research and being thoughtful about what they invest in but you know most people just want to have some financial stability and get on with their life and and so telling but and they lose money by investing in highly speculative things you know investing in too good to be true schemes or just stupid stuff like hearing credit card credit card balances and paying light fees or using overdraft protection. So those are the kinds of books that I try to educate young people starting at an early age. But I do feel this crypto thing is just another way

to take money away from people who don't have the money to lose. And so I wish I'd written about this. Please regulate this market. SEC, the Fed, the CFTC, I don't care. Somebody come in and regulate it because consumers need protections and they're not getting them. Yeah. I will point out, but I think it was in February of 2021 that you, you suggested investors should avoid Bitcoin and you kind of called the top on that. So very good for you. Yeah, it was about 10,000 short, but it was about 50,000 minutes, about 20,000 now. So yeah. And I, I got a lot of flack from that. I don't care if I, you know, prevented some people, especially young people from buying it, speculating in it. I I'm very glad. Um, so, um, you know, it is what it is. The market is

providing discipline now, but it's heartbreaking stories of people losing their money. Well, dear listeners, our guest has been Sheila Baer, children's book author, former FDIC chair, and contributor to the development of the Student Debt Smarter Calculator, available at studentdebtsmarter.org. Sheila, thanks so much for joining us. Thanks for having me, Robert. I really enjoyed it. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.