Motley Fool Money - Inflation Runs Hot

Episode Date: April 12, 2022

Inflation hit 8.5% in the month of March, the highest since 1981, and signs of demand destruction may be appearing in the used car market.   (0:17) Yasser El-Shimy joins Asit Sharma to discuss: - Why investors are hoping that inflation has peaked. - Carmax’s earnings miss and the state of the used car market. - The growing trend of buying homes sight unseen. When are you gonna get me a car? (14:55) Alison Southwick and Robert Brokamp continue their conversation with Ron Lieber, personal finance columnist for The New York Times and the author of “The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.”   Got a question about stocks? Call our voicemail: 703-254-1445   Stocks mentioned: KMX, CVNA, FTCH, ZG, RDFN   Host: Asit Sharma Guests: Yasser El-Shimy, Alison Southwick, Robert Brokamp, Ron Lieber Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

If you're a small business owner, you already know what it takes to keep everything moving. You're juggling customers, invoices, and about 100 decisions every day. Thankfully, taxes don't have to be one more thing on that list. With Intuit TurboTax, you can get your business taxes done for you with a full service expert. TurboTax matches you with your dedicated tax expert. Who knows your industry understands your business write-offs and gives you the personalized advice your business deserves. Upload your documents right in the app, hand everything off, and still feel like you're in the loop the whole way through. You can even get real-time updates on your expert's progress

right in the app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax Full Service experts. Inflation is up, used car sales are down, and millennials are buying homes blind? You're listening to Motley Fool money. I'm Asit Sharma, sitting in for Chris Hill, who's on vacation, and I'm joined today by Motley Fool analyst Yasser El-Chamee. Yasser, how are you doing? I'm doing very well. Thank you, Asit. Consumer Price Index numbers came in this morning, Yasser, and they were hot. Yes, they were. We saw those.

You know, inflation is a hot word right now. Everybody's talking about inflation. You can feel it at the gas pump. You can feel it at the grocery store. You can pretty much feel it everywhere in all aspects of our lives. You can blame supply chain disruptions, labor shortages, energy prices, and so on and so forth. But really, you know, we have seen very high numbers. Not since January, 1989.

Have we seen consumer price index this high, 8.5 percent from a year? earlier, and that is following a 7.9% annual gain in February, so a 1.2% month-over-month increase. So it's not just that the year-over-year comparisons are bad, but prices are just literally increasing on a monthly basis. Of that increase, about 18% gain came from gasoline prices. Like the gasoline went up by 18% year-over-year. So, people are really, really feeling the pain of the pump here. And I guess if you are lucky enough to have an EV, maybe you're not suffering as much.

But as we know, when we talked about those supply chain disruptions, actually being able to place an order for an electric vehicle and actually getting one are two different stories. So these are just high numbers across the board, and the consumer is really feeling it. Okay, but help me out here. I happen to check the market before we tape today, and stocks are up? That's right. You know, it's just basically stock market performance on a day-to-day basis or in the short term. It's really like an expectations game. So analysts came into today expecting roughly this much increase in the CPI numbers. So when it came in line, basically it was kind of a green light that, you know what, this is already priced in. And some analysts are even starting to call this a peak point on inflation here.

So effectively saying this is likely going to be as bad as it gets. And if it's true, if they are correct that inflation is as bad as it gets right here, that means that it should start normalizing and slowing down a bit over the coming months and therefore taking some of the pressure off the Federal Reserve in terms of hiking all those interest rates, you know, month over month. You know, prices aren't the only thing that are rising. Yields are also rising as well. That's correct.

So, you know, because the Federal Reserve has signal to us that it is going to be on this long-term rate hike cycle, that it is, you know, going to be raising rates and not just by 25 basis points every time they're saying maybe even more. in order to try and get inflation under control. This means that, you know, the yield that investors expect on long-term assets, like a 10-year treasury, for example, is also rising. Investors are demanding more yield for their investments on elongated assets because the Federal Reserve is effectively telling everybody,

hey, we are going to be raising rates for a while. So, we just hit 2.75% yesterday, and many observers anticipate that yield to rise to about 3% in the not-distance future. And, you know, as we're talking here about yield, you know, higher yields, what that translates into in real life is effectively higher financing costs for consumers. So the borrowing costs for consumers are higher, and you can see that across the board in terms of, let's say the housing market, for example, you have mortgage rates have more than doubled since the pandemic close. They reached roughly 5.25% yesterday. Even as home prices were up nearly

20% year over year in February. So consumers are getting hit from both directions, both by higher inflation, higher cost of goods, and higher financing costs at the same time. So, if prices are going up, financing costs arising, what are the potential outcomes for demand in this economy? Well, it is possible that we may have something that economists like to call demand destruction. Demand destruction basically means that prices have gone up so fast, so high that consumers simply just bulk and retrench. And I don't know about you, I said, but I personally have been reviewing some of my expenses

recently and trying to kind of cut down on some of those perhaps discretionary items and spending. I'm thinking, for example, some streaming channels that I may not be watching as much. And just anecdotally, I purchased airline tickets to go visit my home country of Egypt for the summer. I bought those tickets in early January. Now, just since January, those same tickets will cost you 40% more than when I bought them. I know other friends who are rethinking their travel plans in light of just how expensive airline tickets have become, for example. And therefore, that's what economists start to think about when they talk about demand destruction, that prices are just going up so fast, so high.

that people simply, you know, change their consuming decisions. CarMax earnings out today, Yasser, and on the sales front, the revenue front, they look strong to me. That's right. Asa, the stock is down. So, Carmack's actually beat on revenue estimates. Sales are up 49% year over year, but it did miss on the bottom line with net earnings down 23% from a year ago. Now, this happened due to a plethora of.

free zins, including high labor costs and shortages and so on, but also having because people are buying fewer used cars. In fact, the volume and dose is down about 6.5% year over year, but they are buying them at a higher average selling price, which is why the revenue is up. So, you know, I imagine this is not going to last for very long. CarMax is going to have to start discounting its inventories in order to achieve a higher turner. over. Still, it was not all bad news for CarMax, though, as their national market share did grow in this quarter, which meant that they outperformed the overall used car market, which is showing signs of decline.

And this is interesting in relation to what we saw with the Consumer Price Index numbers from this morning. That's absolutely right. So, CPI numbers revealed that March was actually the second month in a row where used car prices decline. And in fact, analysts have been warning for a few weeks. now that the used car market may have already peaked in January. So, you know, I think it will be interesting to see how other used car retailers like Carvana, for example, do in this environment. Carvana was a huge beneficiary of the migration online of car buyers since March 2020,

both in terms of volumes of cars sold as well as revenue. But they are facing the same environment that CarMax is facing now. And CEO Ernie Garcia was kind of pressed on that during. the last earnings call they had for Q4, 2021. But he tried to dispel concerns about, you know, the sort of the prospective decline of sales prices moving forward. And he noted that Carvana actually stands to do better. And that is because Carvana has to compete with other dealerships for, you know, to source costly and hard-defined used vehicles. And if that is no longer the case, the company may be able to source those cars at a lower cost and have a great,

radar selection variety for buyers. And finally, it's probably better in his view for the used car industry to have prices go down in order to offset those rising costs of financing. So if it costs the average consumer more to finance a car, maybe that ticket should come down a little bit to make it a bit more affordable. And he did note sort of a discrepancy between the share of growth in terms of vehicle sold. between two cohorts, a cohort that makes less than $50,000 a year versus a cohort that makes over $100,000 a year. And needless to say, the former category of people making less than $50,000 a year, they're really feeling the pain and they've really cut down on their expenses, including obviously buying a used car here. So perhaps a more normalized used car market is not bad news

after all. Redfin out with a survey that had a very interesting observation about the habits of homebuyers in 2020. That's right. So according to Redfin, 63% of home buyers in 2020, mostly millennials, made an offer on a home without seeing it in person. Again, you know, this is the largest purchase for most people in their lifetime buying a home. And yet 63%, let me repeat that, 63% of home buyers in 2020 made an offer in a home without seeing it in person. Now, this is enabled, thanks a lot to advances in technology, so you can go to websites like Redfin and Zillow and others to just browse listings of homes, take tours inside of those homes, if you want, sometimes 3D tours even, and look at photos and sometimes supplement that also

satellite images from above that can tell you what the house looks like from above, but also what the neighborhood looks like from above. And so, armed with all these resources, buyers, especially millennials and younger generations, are moving online into some of the high ticket price purchases that they would have to make in their lifetime. I used to think this is a generational thing, but Yasser, it seems like the technology has improved so much that even people who grew up physically inspecting cars, houses, big-ticket items, refrigerators, I think that the edge technology gives you is replicating that physical experience

while you're sitting in an armchair at your kitchen table. Do you think that this will only increase as time goes on? Or maybe people who are buying what could be near a market top might have regret later on that they didn't take more time with their purchases or maybe have some buyers remorse after moving in. No, these are good points. I said, I think that we definitely saw a spike during the pandemic and the lockdown where people had to sit at home. They couldn't go to work. They couldn't go. So, for example, for car buying, they couldn't go to dealerships. For perhaps home purchases, maybe they couldn't

travel to another state in order to look at houses in order to buy the that second home or that rental property that they're going to invest in. So I anticipate some of that to normalize, but I also see that consumers have experienced the utility and convenience and in fact, safety of doing a transaction, a high-ticket transaction online without getting scam necessarily or without sacrificing too much. So, whether they pay too much or paid too little, I think only time will tell. Although, you know, for home buyers who bought in 2020, I think they're sitting on some pretty hefty gains already.

But I do expect that trend to continue. We have seen that trend of, you know, consumers buying high-ticket items online, be that in the real estate market. So, for example, through eye buying on platforms like Redfin or Open Door. Or in the used car market, so platforms like Carvana, for example, again, it's something that increases people's ability to purchase cars. Maybe when they do not necessarily want to go from one dealership to another looking for that perfect car. Instead, they literally have a national inventory of over 20,000 cars at their fingertips. Also, in the luxury apparel space.

We're talking here about $800,000 sweaters, for example, that it's definitely not a cheap purchase, and people used to have to go to those luxury apparel stores and so on in order to try them out, feel them before they commit that much money to a purchase like that. But now with platforms like Farfetch and others, Consumers don't have to make those trips. They can buy and feel confident about their buying decisions because they can always return what they bought,

at least in the case of the car and the apparel. I don't know about the houses. But I see this trend has less. Yeah, Sir, El-Shamee, thanks so much. You're very welcome. Awesome. Thank you. Next up, Alison Southwick and Robert Brokamp continue their conversation with Ron Lieber on how to

talk to your kids about money. Lieber is the columnist of Your Money in the New York Times, and he's the best-selling author of The Opposite of Spoiled. Last week, with the help of Ron Lieber, you learned how to answer some tough questions that your kids are probably at some point going to lobby your way. Questions like, why don't we have a vacation home? Or insert really anything there for vacation home. And how much do you make?

Well, Ron Lieber, thankfully, is joining us again this week to answer three more tough questions that your kids may ask you. And he's going to offer advice on how you can use these conversations as an opportunity to instill the values that you want them to carry with them for the rest of your life. So, you know, just something light and friendly like that, huh, Ron? You always sound light and friendly to me. I know. It's just, it gets so heavy. Like, we're like, John Tillie going to talk about money, but then it's like, and by the way,

you are instilling values that your kids will carry with them for the rest of their life. So don't mess it up. Well, this is the thing, right? I mean, we can take this. it's possible to take it too seriously. And it's also possible not to talk about it enough or to be afraid of it. But really, there's no reason to be afraid. And, you know, good values make for good conversation, right? So, you know, no fear. I've set these questions up sort of to grow as our kids grow. So our next question here, we're going to start dealing with our kids actually having

money of their own to deal with. So our next question that you're going to help us answer is, what is this weird piece of paper grandma stuck in my birthday card? You and I know it's a check. I don't know if our kids know what that is, but can you talk a bit about working with your kids, helping them now that they're starting to get money to spend themselves? Yeah. I was just thinking about this morning because our 16-year-old is going to have a real paid job this summer.

And I was trying to puzzle out if she gets paid by paper check, number one, Well, she does know what a paper check is because she's gotten that weird money stuffed in her card. But then, like, what is she going to do with it? Does her, you know, teen debit card app, can they even deal with paper? I don't actually know. So, yeah, I got to figure that one out. But, you know, in terms of the check that comes for, you know, the six-year-old or the eight-year-old or the 10-year-old, it's often a difficult thing to explain. It's a little abstract, right?

I mean, you can say, well, this piece of paper is sort of the same thing. thing as the green cash money you've seen before. But you can't take this piece of paper and, you know, spend it at Clare's on hair accessories or at the, you know, video game store or at the bakery, right? You have to give the piece of paper to me, and I take out my phone, and I take a picture of it, and then it magically turns into money at our bank. And then we can pull some money out at one of those machines that spits out the green cash money, and then I can give it to you and you can use it. And they'll probably be a little confused about that. But if they ask questions, great, because then you can explain the banking system. Yeah, and you actually do value

that cold hard cash for kids to actually hold it and physically do something with it. Yeah, here's why I like green cash money. It's visual and it's also visceral, right? So it's visual, because you can watch the single dollar bills, you know, kind of accumulate in a savings jar or a spending jar or, you know, giving or charity jar. But it's also visceral in that you can kind of take it out and hold it and count it, right? There's some math stuff in there. But there's also a real beauty. We just did this with a six-year-old, actually. She had saved up six or eight months of giving money, and she decided she wanted to.

to donate it to the PTA at her school because they were buying a whole bunch of, like, oversized soft blocks to have on the playground. I don't know if you've seen these things, but they're like four or five feet tall, and they build crazy stuff with them, and it doesn't hurt you when they fall in your head. And so they wanted to spend, I don't know, like $10,000 on like a whole set of these things or something. And Violet took her, you know, $52 or whatever, and she brought her jar. And she handed it off on the corner to like the treasure of the PTA. And she felt so great about herself, right?

Like here was this pile of money that she could see and she could feel. And she was giving it over to a person who was going to do something cool with it for the community. And that was cool. So when I read your book way back in the day, I had a three-year-old on my hands, maybe. But as soon as like I could, I got, I did what you said. I got her the three jars. one was give, one was save, one was spend. And thankfully, she has very generous grandparents who don't know what to buy her.

So they often just give her money. And it really has been so great to be like every time she gets, you know, money, we say, all right, we divide it. You know, now you got to do the math. You got to divide it into the three jars. And, you know, this is your money that you get to spend. This is what we're saving long term. She says she's saving for a horse.

But no, I'm not going to help with that. And then the give jar, which she usually gives to the animal shelter. And we had this interesting moment at, I was talking to a mom who's her best friends, my daughter's best friend's mom. And we were talking about how, oh, you know, we just bought you a gift for Hannah's birthday because Hannah bought us a gift and blah, blah, blah, blah, blah. And I was like, well, no, Hannah, well, I was like, yeah. I mean, Hannah wanted to buy Sylvia a gift.

So she bought Sylvia a gift. And Sylvie's mom was like, well, no, but you bought it. And I was like, no, no. Hannah, Hannah bought it. Like, she wanted to do it. So I'm done, I'm done buying her presence for her friends. Like, she's got her jar of spend. And she gets to do it.

If she wants to get her friends a gift, she is paying for it. And the mom was like, so taken aback. I was like, yeah, yeah, I'm done paying for that. She has to do it on her own. And it was such a great feeling. So thank you, Ron Lieber, for that one. Glad to take credit for any and all of it. All right.

So for our next question, it is, can I have an allowance? Or generally speaking, what's your philosophy on chores, allowance, paying your kids, that whole thing? So first of all, the answer to that question is pretty much always yes, unless your kid has proven irresponsible in a way that's relatively unusual, right? There are kids who eat the money. There are kids. There There are kids who, you know, sort of rip up the money or turn it into art. So, you know, once you get beyond like the gobbling of the coins and the scissoring of the $10 bills, then it's cool, right? And, you know, I like a couple things about this three jar approach, save, spend, and give.

It allows kids to begin to understand the concept of tradeoffs, right? Because that's kind of how we've grown-ups budget our money, even if we don't really think about it that way all the time. And, you know, gives them practice, right, in learning, you know, the patience and perseverance around saving and, you know, the prudence and the thrift around spending only on the things that make you happy and then, you know, giving to people who have less than you do or who need it more. So this is all good, right? I like the allowance connects to values. And, you know, one of the questions people ask most often is what should they have to do in exchange for it. And I think other than not eating it or not cutting it up, I think the main thing

that they should have to do is actually nothing. A lot of parents want to pay for chores because they think that that instills a good work ethic. I guess I would rather see kids go out and get jobs in the community where it's not their blood relatives who are the bosses. I think kids should do chores for free, the same way the grownups do, because that's what we all do to try and maintain an orderly living space. We do that because we love one another in addition to the fact that we value order, right? And the problem with paying for chores is that if you create an employer-employee relationship, at a certain point, the kids who are good savers are going to be like, well, I have enough money for a while, so I'm not going to do the chores. Right. And then you're sort of in a

pickle. So don't back yourself into that corner. And if you're looking for leverage over them, the best way to get them to do what you want is to turn off the internet. Yep. Right? Not to punish them or take away money. Just take away the things they want to do, right? And most kids want to be online in some ways you perform. Right. That's what's probably happening instead of the chores. They're not just sitting in their room counting money there. Like little spritic ducks. It creates more time and space for the chores. That is true. Yeah. All right. Our last question we have for today. Will you buy me a car or perhaps it's maybe more accurately phrased as, ugh, when are you going to buy me a car?

Everyone I know has a car. At least that's the tone I imagine my daughter is going to take when she's 15. Hopefully not. Hopefully not. Yeah. So I needed to be educated a little bit on this one because I grew up in a city with a lot of public transportation and I live in a city with a lot of public transportation now. And the thing that people like me tend to forget is just how much time parents spent as chauffeurs, you know, from the ages of zero to 15 and 364 days, right? And when kids turn 16, It can feel like a sort of liberation, right, for the parents. And you've got all of these hours back again that can be used for leisure or to make more money, right? And so there's a way to sort of economically justify buying a kid a car that feels to you like buying back your own time.

So I don't want to discount that element of it. I think it's real. You know, we all sort of like chuckle, you know, when we think about it that way, but it's, but it has more than the ring of truth. So I don't feel like you're spoiling your kid just because they have a car. Now, I think it's possible to go too far, right? Parents may talk themselves into the fact that kids need to have the most like modern version iteration of the best possible safety equipment. because they're spending too much time looking down at their phones, no matter how hard, we try to keep them from being distracted generally and distracted driving in particular, right? So we want all the collision avoidance stuff and, you know, the lane wandering avoidance stuff, and that's all well and good. But the answer is not a 2022, you know, Lexus or whatever,

if you can afford such a thing or willing to borrow for it. The answer is not that they get a newer car than you have. I actually went and looked at this for a New York Times column a couple of years ago now. And I think if you Google 2015 Chevy Malibu, what you'll find is that all sorts of used cars out there up to, and including five or six-year-old ones, have the safety equipment that we want our kids to have. This stuff has actually now been around for long enough that a three to five-year-old used car of many makes and models will do the trick. They do not need a new model sedan to do this. And then to the extent to which they're using it for leisure, right, you can ask something of them, right? Maybe they're paying for their portion of the radically increased insurance premium, right?

or maybe they're paying for gas or they're paying for maintenance. You know, you can work it out in whatever way you want. I will just totally agree with the whole buying your freedom. I mean, my goodness gracious, the day when we didn't have to drive our kids all over the place to and from school was certainly a liberation. I did want to ask you, though, one other thing, though, because it was from your book was the Dewey Rule, which really just addresses the whole idea of the question of,

when someone else, you mean, the kid decides, well, everyone else has this, why don't I have it? So as I remember it, it was based on a fellow by the name of Branson Dewey, who had a penny-pinching father, thought he was poor, but then he took over the family business and found out he was rich. So Mr. Dewey came up with a rule about when a kid should get some sort of new thing or new technology. Can you remember what the percentile was on that? Yeah. So when Mr. Dewey was younger, they wouldn't even let him play youth hockey. Like, they wouldn't even buy them the used equipment because they just felt like it was, you know, extraneous. They felt like it was unnecessary.

And he always felt deprived by that. And then when his dad died, it turns out dad was sitting on like a $30 million dollar Manhattan real estate portfolio. And he inherited, you know, a third of it. And from that point forward, he never had to work another day in his life for money. And he didn't. He hung it up, right? But then he had a couple of kids and he had to figure out, like, okay, I don't want to overcompensate, you know, 180 degrees on this.

So he basically settled into this idea where, like, if there was something that his girls really wanted, other than hockey, which he made sure they could do on day one when they wanted to, that they were going to be like the seventh out of tenth of their good friends to get the thing, right? because what he found out was that, you know, by the time the fourth or fifth kid gets the thing, the first kid sometimes moved on to the next thing or, you know, those fourth or fifth kids have realized that like the thing isn't really all that cool or interesting anyway. And so often you didn't even have to buy the thing. But if it turned out to be a thing that had some staying power, you know, then they would have the conversation about, all right, well, what's the need version of the thing? what's the want version of the thing and what's an appropriate amount, you know, for me and mom to contribute, right? And how much, you know, towards the nicer version of the thing, are you going to pitch in without your save or your spend jar? And that's kind of where he settled in.

Ron, thank you so much for joining us. Do you have another book coming out? You must at this point, because you've written about, you've written opposite of spoiled. You've also written a great book about paying for college. What's next? I have a big idea that I'm not going to share in a public form that could start as a book, but would require one or two years of just full-time wind-up. And so what I really want to do is have it be a TV show. And that's all I can say for now. Wow. It's very much about money. It's very much about money. And it's about something that every single one of us has thought about before, but the vast majority of us have never experienced.

Okay. Well, coming to a TV near you, but, you know, but, you know, In the meantime, of course, you can find more of Ron Lieber at the New York Times. Ron, thank you so much for joining us. It's always a pleasure. Thank you for having me. As always, people on the program may have interests 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 Asit Sharma. Thanks for listening. We'll see you tomorrow.