Why_the_PPP_could

00:00:00.000 | Hello everybody it's Sam from Financial Samurai and in this episode I want to

00:00:04.480 | talk about the Paycheck Protection Program again because I'm on record as

00:00:08.600 | saying it's the best economic rescue package I've ever seen. It's impactful,

00:00:14.640 | it's a lot of money and I think it's gonna make a big big difference as

00:00:19.080 | millions of small business owners get their PPP loans that will ultimately be

00:00:25.000 | forgiven. Now I'm always trying to figure out and discuss what are some downside

00:00:30.400 | risks because I do believe there's gonna be a recovery in the second half of this

00:00:34.120 | year and based on my previous podcast I did talk about buying the dip. I wasn't a

00:00:40.320 | seller of the dip I was a buyer of the dip because I think things are gonna

00:00:44.720 | improve and they have so far but nothing is ever over and I'm always trying to

00:00:50.160 | make sure that okay what am I missing in terms of my investment thesis because

00:00:54.400 | the ultimate goal is to try to make money or outperform the markets. My

00:00:58.280 | ultimate goal is that continue to grow my net worth every single year in a

00:01:02.640 | risk-adjusted manner and I hope the same thing is for all of you. So regarding the

00:01:07.800 | Paycheck Protection Program we know that it's now about six hundred sixty billion

00:01:13.560 | dollars. Initially it was three hundred forty nine billion and then they had the

00:01:17.440 | PPP package two so it's up to six hundred sixty billion dollars. We also

00:01:23.080 | know that successful loans are being distributed right now and if you get

00:01:28.440 | that money and you pay your people the same and you keep the same amount of

00:01:33.040 | employees the same for eight weeks after you get the money, theoretically the

00:01:39.100 | government has said they will forgive that entire loan. So it's like free money

00:01:43.520 | if you follow their rules. However I was talking to my wife the other day and we

00:01:48.160 | kind of got into a little bit of an argument because she was saying well I'm

00:01:52.120 | not so sure that those loans will be forgiven. So I had to go back and look at

00:01:57.440 | the post that I wrote on PPP and look at other articles and basically argue with

00:02:02.920 | her and say well why wouldn't it be forgiven if they follow these rules

00:02:07.000 | unless the government is lying. What is the intention of the government to give

00:02:10.240 | this PPP money? The intention is to inject money into small businesses which

00:02:15.480 | employ almost half the working population and to get people employed

00:02:19.920 | and stay employed or to get people hired back because small businesses can hire

00:02:25.520 | back employees within eight weeks or by June 30th and keep them at the same pay

00:02:30.560 | rate to get their PPP money forgiven after eight weeks. But what happened in

00:02:36.240 | this conversation with my wife is that she gave me doubt. She gave me doubt that

00:02:40.920 | businesses might not spend their PPP money because they are unsure about

00:02:46.880 | whether the government would forgive these loans or not because really

00:02:50.080 | nothing is for certain until the money hits the bank and until the government

00:02:55.280 | says okay you're good to go. There is never a hundred percent certainty in

00:02:59.000 | anything really in terms of investing, in terms of getting free money. There's

00:03:03.600 | always probabilities. You always want to think of probabilities. I think the

00:03:06.680 | probability of getting the money, the PPP money forgiven if you follow all the

00:03:11.360 | rules which are clear but not crystal clear is about 95%. It's only a 5%

00:03:18.280 | probability that the government reneges on its promise. But that reneging of the

00:03:23.360 | promise is what makes me a little bit fearful. My initial thought was why

00:03:28.080 | wouldn't every single small business apply for the PPP loan? It's free money

00:03:32.960 | if you follow their rules. But as I got to thinking and talking to other small

00:03:37.240 | business owners it's just not the case. 55% of small businesses in the CNBC

00:03:43.840 | SurveyMonkey survey opted not to apply for PPP loans and 71% did not apply for

00:03:50.280 | an economic injury disaster loan. And what would the reason be for not

00:03:54.680 | applying for free money? Well I think it's many small business owners just

00:03:58.840 | didn't like the model and knew they could not abide by the rules to get the

00:04:03.600 | money forgiven. When I published my Paycheck Protection Program post I had a

00:04:09.280 | lot of back-and-forth discussions with very intelligent readers saying my

00:04:16.120 | calculations were wrong. You can't get more than $8,333

00:04:21.240 | times 2.5 per employee for the PPP loan and so forth. I mean these were readers

00:04:27.120 | who are lawyers and bankers because there's so much confusion and even

00:04:32.640 | bankers that I talked to who were doing these PPP loans didn't know for sure. But

00:04:36.920 | the end result is you could get actually more than $8,333 per employee

00:04:41.960 | times 2.5 because 75% of the PPP loan goes to payroll and another 25% can go

00:04:50.680 | to something else. And the cap is $100,000 annual income per employee to do

00:04:55.320 | the PPP calculation. So yes I might have just lost you here but that's the point.

00:04:59.680 | It is a little bit confusing and even the smartest people that I know in the

00:05:04.160 | business don't even know exactly what's going on. So on the one hand, the bullish

00:05:08.800 | hand, more and more businesses are getting their PPP money. Now only

00:05:13.960 | supposedly 13% of the 45% of small businesses who applied for the PPP were

00:05:19.080 | approved as of early May. Among all respondents 7% already received

00:05:24.520 | financing and 18% are still waiting for a response from a lender. So this is not

00:05:29.640 | that encouraging of a number but if you look at the positive side that means a

00:05:34.680 | lot more businesses will get their money over the next 30 days and every single

00:05:39.960 | business that gets their money is gonna feel great. They're gonna feel like they

00:05:43.040 | won the lottery and they're gonna be able to retain or hire back employees

00:05:47.720 | that they lost during the lockdowns. This is incrementally positive and this is

00:05:51.620 | what the the stock market is assuming. Now on the negative side which is what

00:05:58.200 | I'm alluding to in this episode and the discussion I had with my wife is the

00:06:02.840 | confusion. The confusion already has eliminated about half the small

00:06:07.600 | business owners who did not even bother to apply for the PPP loan because they

00:06:11.400 | knew they wouldn't be able to follow the rules to get the loan forgiven. Now what

00:06:17.480 | about the half who did apply and they're gonna eventually get the money? I bet

00:06:23.000 | there is a good percentage of these small businesses who are gonna be too

00:06:27.540 | fearful. Too fearful of spending the PPP money because they're thinking about a

00:06:32.400 | scenario where they're thinking okay let's spend the PPP money on employees

00:06:37.240 | and then 25% of the PPP money goes to rent and mortgage and whatever else to

00:06:41.560 | run the business. What if we spend that money let's say you get $100,000

00:06:47.000 | you spend the money and then eight weeks later the government's like okay let's

00:06:52.120 | see how you spent the money. Did you follow instructions or not? And you think

00:06:56.720 | you followed instructions but the government said well you actually didn't

00:07:00.000 | follow the instructions so we're only gonna forgive 25% or 50% of your PPP loan.

00:07:05.160 | Now the business might be thinking oh man we're kind of screwed we spent this

00:07:10.200 | money our revenues ticked up a little bit but not as much as we had hoped and

00:07:15.680 | now we have debt. We've got 75% of that PPP loan is that or 50% of the PPP loan

00:07:22.000 | is that or maybe we have a hundred percent of the PPP loan as debt because

00:07:26.560 | we didn't follow the instructions properly. So in that scenario you can see

00:07:31.640 | in a couple months right maybe in June or July probably July or August that

00:07:38.480 | some businesses might be in further trouble because not only did their

00:07:42.720 | revenue stay flattish or not rebound as much they actually have more debt. So I

00:07:48.760 | think a rational business would be very cautious in spending their PPP money.

00:07:54.000 | They would set aside other money that equals or surpasses the PPP money to pay

00:08:00.200 | back any kind of PPP money that's not forgiven. So you can see how at least a

00:08:07.200 | small percentage of businesses let's say 10% are gonna be continuously very

00:08:11.840 | conservative after they get the PPP money and this is going to translate

00:08:17.320 | into disappointing earnings and under delivering on expectations and when you

00:08:23.920 | have disappointing earnings and under delivering on expectations which

00:08:28.400 | hopefully have been lowered over the past two months you're then gonna see a

00:08:33.280 | decline in the stock market because the stock market is basically a valuation on

00:08:38.320 | earnings and future earnings growth. So in conclusion I just want all listeners

00:08:42.960 | to be aware to watch out for things that are not going to happen as expected.

00:08:50.000 | We've experienced a fantastic rebound in the stock market and I think the

00:08:54.880 | expectations are very high now that things are gonna get much much better

00:08:59.920 | but like everything it's all about under promising and over delivering and it

00:09:06.040 | feels to me like the expectations are now too high for a strong recovery. So I

00:09:12.160 | personally am de-risking. I think the easy money in terms of the rebound money

00:09:16.640 | has been made in the stock market and I'm looking elsewhere for opportunity

00:09:20.560 | and I think that opportunity is in the real estate market because it lags on

00:09:24.600 | the way up and also lags on the way down. So I think there is opportunity if we go

00:09:30.880 | about and look aggressively and I'm going to talk about it in a future

00:09:34.240 | episode. Real estate is my favorite investment class to build long-term

00:09:38.160 | wealth and I want all of us to be vigilant in looking at scenarios in the

00:09:44.360 | next one or two months that could disappoint expectations. We know that

00:09:49.480 | PPP could disappoint expectations in terms of what the government and

00:09:54.080 | investors think on how small businesses will spend their money. We've just got to

00:09:59.400 | keep on looking at what else could disappoint expectations. I mean there's

00:10:03.240 | earnings growth for publicly listed companies that are coming out right now

00:10:07.320 | for the first quarter and there's guidance for second quarter and beyond.

00:10:10.200 | Many companies are just not bothering to provide guidance and you know what maybe

00:10:14.360 | I wouldn't too because it's so unpredictable what's going on. And there

00:10:18.320 | could be other disappointments in terms of unemployment benefits or maybe

00:10:21.520 | there's expectations about a second or third ongoing stimulus check or

00:10:25.520 | universal basic income. You just have to be aware as an investor what the

00:10:30.000 | expectations are and what the reality is. So thanks so much everyone. Stay safe,

00:10:34.760 | Stay vigilant, and if you like this podcast, I appreciate a positive review and share it around.

Why_the_PPP_could_disappoint