Motley Fool Money - 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

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard. Daredevil Born Again official podcast Tuesdays and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. We've got a dividend king raising guidance and the former head of the FDIC raising the caution flag. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior analyst, Asset 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 percentage points if they can do it. Usually, inflation is running 2% points a year. So,

PepsiCo can grow its revenues by 4 to 5%. Investors are happy. Here we have organic growth, which grew 13% in the second quarter. quarter. The company is promising that organic growth will be 10% for 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've 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 getting. 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.

I mean, credit to CEO Ramon Laguarte, who came in with this theme of Faster, Stronger, Better, which sounds like a piece of electronica from. the aughts, 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. I can't even, I mean, 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, right, 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. And you're absolutely right, Chris. a combination of some very efficient bottom-lined 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. So 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. Well, and 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 they actually do. 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, right? So PepsiCo, Coca-Cola, and Pears, I would throw Kurek, 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 a 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. So 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 well. Earning 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 earning 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 bell weather 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 sort of 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. So 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. And 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's high, but people are finding comfort in paying up for a rather higher-end goods. like 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. So 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 6th,000. 60% year-to-date responds to some good news and hopefully some good guidance as well. Asa 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 bigger pockets. 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 Bigger Pockets. And in my new show, On the Market, a Bigger Pockets podcast presented by Funrise,

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 Bear 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 smart. 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.

Given your experience, are there any other reasons that strike you as a cause for the higher prices? Well, there's not a lot of cost disciplines. So, you know, you think, and people think it's faculty salaries, it's really not. There's too many buildings, administrative bloat. 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, you know, 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.

your own 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 the goals. No, it's not. And I wish people would stop blaming professors. We should be spending more on them, unless on all this, administrating people. Yes, absolutely.

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, 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 day you can afford to repay once you graduate. So you can put in any combination. It's very easy. There's no data harvesting. There's 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, your parent plus, you know, those that have a higher market rate than subsidized debt, if factors add 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 that are 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, D.C. I was an English major. I was a teacher in Washington as I graduated. So you put in 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 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. And it moved up how much I can borrow from 32,000 to 36,000.

But I had, because I was in D.C., it's 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 are all the costs that are associated with that. That's right. That's right. So yeah, and you can put in as much different, you know, any combination of factors. You don't need some of these other tools that are available now. They ask for all this personal financial information. You don't have to 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 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. You know, the amount of student debt is 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, you know, a good chunk of those students were in default,

a good chunk of those students, first genes, 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 and 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 debt and creating potential expectation that's going to happen again. And I must say student debt 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 have already taken on unaffordable debt levels, I am sympathetic to $10,000 of that cancellation. And since this often becomes a political discussion, I think it's interesting to point out that it came to Washington as to work on Bob Dole staff. And you're, I think, consider yourself a pretty traditional conservative. I am, I am a, yes, I'm very traditional fiscal conservative.

You know, and with my family finances too, you know, my parents were Depression era children and really instilled fiscal prudence. And I think I passed that on to my children, too. and we save money and we were, you know, I understand not on parents can do that, but, you know, for parents who can't do have the capability, that is another way to minimize debt loads. It's just, you know, start, start, when they're born, start saving. Put it in a 529 or an education account. That's another good way 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's you can't, it doesn't have to be a 529. That's right. there are different options. So moving on from student debt and sort of harkening 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 rising interest rate environment. So people usually think, well, an interest rate goes out, oh, banks are, 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 ways. One, banks with large market exposures, you know, like Morgan Stanley, Golden 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, you know, 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 used through that, but they also assumed inflation went magically drop, and then interest rates would go back to zero. And, you know, 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, and somehow all these other problems are going to get magically fixed just isn't correct. I do think it's called stagnation. We need to stress banks, these big banks, especially with market exposures through a stagplation environment where you can have double-difference employment, double-digit interest rates, double-dget 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 at the top of my list. From my individual investor level, I worry about crypto. You know, we've seen a couple trillion dollars of wealth, you know, wiped out already.

of that as speculators a lot of it, because of young people, that, you know, the crypto industry really markets to young people. I hate it. It's volatile. It's not, you know, 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, you know, I write money books for kids, too. One of the things I try to do with my money books, there's so much literature out there about, oh, here's how to get rich, here's how to invest in the stock market. Here's how to take it 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 it can buy these rich quick books, but, you know, most people, they just want financial security. They don't, you know, they're maybe smart enough to listen to Motley Fool if they are in their 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 so telling, but 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 balances and paying late fees or using overdraft protection. So those are the kinds of books that I try to try to educate young people starting an early age. But I do feel, you know, 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 wish I've written about this. Please regulate this market. SEC, the Fed, the CFDC, I don't care.

Somebody come in and regulate it because, you know, consumers need protections and they're not getting them. Yeah, I will point out that it was February of 2021, that 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. Then I was around $20,000 now.

So, yeah, and 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'm very glad. So, you know, it is what it is. The market is providing discipline now, but, you know, it's sort of heartbreaking stories of people using that. 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 ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.