(upbeat music) - Hello, and welcome to another episode of All The Hacks, a show about upgrading your life, money and travel. I'm Chris Hutchins. I've kind of lost my voice, but I'm excited to have you here today. Now, you may already know that I'm a big fan of the Animal Spirits podcast, which is all about the markets and investing.

And in light of everything that's been going on recently, I wanted to invite the show's host and my friend, Ben Carlson, to join me again today on the podcast. Ben's also a financial advisor at Ritholtz Wealth Management. He's the author of four books about saving, investing and money. And he's become one of my go-tos for questions about investing and personal finance.

If you wanna check out our last conversation, it's episode 42. But today we're gonna talk about the state of the market, the regional banking collapse, interest rates and inflation, and what we should all be doing about them, including anyone who's looking to buy a home right now. I am really excited about this one.

So let's jump in right after this. (upbeat music) Ben, thanks for being here again. - Glad to be back. - There is a lot going on in the economy right now. We're recording this on May 18th. Seems like everyone I know, both now and for the last three or four years, has been saying, "Oh, there's a recession coming.

"We gotta prepare for it." I feel like I keep hearing this message. Maybe that's just what everyone is always saying, but how would you describe the current state of the markets? - It'd be the most telegraphed recession in history, right? If and when it happens, everyone can say, "I predicted it," because that's what everyone's been doing for a couple of years now.

It's a weird time because the economy remains stronger than anyone could have imagined, with the Fed going from 0% to 5% on rates. If that happens, which this is the fastest rate hike we've seen in history, most textbooks would say, "Okay, the economy's gonna slow down. "It's that much harder to borrow, "and rates go that much higher "in such a short period of time." The economy has to go into recession, and the Fed has wanted people to basically lose their jobs to slow things down a little bit, and it hasn't really worked as much as they would like.

The unemployment rate has actually fallen since the Fed started raising rates, which is not what you would expect. So the economy is way stronger, I think, than anyone would have imagined, in terms of people still wanting to spend, and the unemployment rate remaining low. It's as low as it's been since 1969.

Everyone's waiting for the next shoe to drop, but as of right now, things remain okay, especially considering the environment, that no one would have expected things to remain this strong, yet here we go. - For anyone without context, why is the Fed acting so aggressively right now, or has been, to raise rates in an unprecedented speed?

- They just don't want inflation to be entrenched. That's what happened in the 1970s. Inflation was here for a while. It had started rising in the '60s, and then throughout the '70s, we had this 15-year period where inflation was basically above 4% or 5%. It got as high as 15% in the early '80s, and the problem is, once the psychology of inflation takes hold, and you start to think, "Things are going to be more expensive in the future, "so I'm gonna buy stuff now, "and I need more money through my employer," so there's like this wage price spiral where people need more money, which then pushes up prices more, and the Fed doesn't wanna get into that sort of psychological situation.

They're just terrified of a 1970s repeat. There's a lot of reasons. I think those fears are a little overblown, but high inflation hasn't happened in this country for the past 70 years. That's like the one period we can point to, right? The 1970s and the early 1980s, so they're just deathly afraid of that situation happening again, so they want to stop it before it gets really ingrained in our psyche.

- Has it worked? Is that risk off the table, or is it still looming? - So inflation is still higher than most people would like. It's still running at 5% or so annualized over the last 12 months. The Fed wants it to be at 2%. I think it's going a lot slower than they thought, but if you look at the past, inflation doesn't just all of a sudden go from 9% to 2% in a straight line.

It takes some time to work this stuff off, and so I don't think it's as easy as most people would like it to be. The Fed seems to think that they still have a little bit of work to do because they're keeping rates higher and potentially raising them even more.

- I know there's been a handful of things on a macro level. There's been this debt ceiling conversation. There's been regional banks collapses. How much of those totally separate factors are part of all of what's going on? - It's one of those unintended consequences thing that the Fed raised rates because they wanted to slow the economy, and that would have maybe thrown some people out of a job, and that would have slowed demand, right?

That's the whole idea. They want people to spend a little less so the prices stop going up. The unintended consequence is these banks all purchased bonds at ultra-low rates. The generationally low rates we saw, 10-year treasury yields were at 1%, which is as low as they've ever been, and banks bought them, and the Fed raising rates this high basically messed up the balance sheets of these banks.

So that was one of the unintended consequences of it. - It seems like we've learned some lessons from 2008 and that we're not just gonna let contagion happen from that sort of stuff. This is a completely different situation from that, in that we're not dealing with a bunch of credit problems and people overextending themselves in the housing market and that sort of thing.

So this isn't 2008, but I do think if you put some truth serum into the Fed officials, they'd be surprised that this is the way that it played out, that we have a banking crisis before the economy slowed, and they've been able to clean it up so far without many huge problems.

- Yeah, I mean, as an SVB customer, I could say that there were four days of angst and anxiety. - Yeah, you had a bad weekend, right? - But at the end of the day, everything was there. My mortgage is still with SVB, or I guess with First National, I think, or whatever the name of the new bank is, but it kind of all worked.

- Well, I'm gonna ask you, what's that like now? Is it just the same thing, basically? Do you feel like anything has changed? - It's interesting because SVB was kind of a reputational bank. The reason most people banked with SVB was that they just had great relationships in Silicon Valley.

And it wasn't actually the migration from SVB to First National that made me think, "Okay, maybe this isn't the right fit for me anymore." First Citizens, sorry, I just remembered, First Citizens. - There's a lot of first something banks. - I know, I know. I wonder if the history of that, by the way, is that people wanted to be the number one ST at some point in the phone book, and then they were like, "Well, now that that doesn't matter, "we don't need to spell it with a number." But digression, people that I've heard that work at SVB are now, and this is very anecdotal, but kind of not treated like first-class citizens at the new institution.

- That makes sense. - Which we've kind of heard from a few people, which led me to say, "Look, if this new bank "isn't gonna treat their employees great, "how are they gonna treat their customers in the long run?" So we were kind of benefits of the JPMorgan Chase crazy weekend of let's go steal all the SVB customers.

So we took the bait there and moved over. There wasn't really any incentive other than moving over. And so we still have our mortgage there. I still have an auto ACH three days before the mortgage payment to move the mortgage payment into the SVB account so that it's ready for the mortgage withdrawal.

But other than that, I think we've kind of fully migrated away, but not for reasons that I'm worried about the money. I'm not worried the money's gonna go away. - They've done a good job shoring that up, and people worry about, "Oh, we're gonna lose faith "and trust in the whole banking system." Probably not.

It's probably more these bigger banks are just gonna get bigger. And you're probably not gonna see as many perks as you were getting at an SVB kind of bank as you would have in the past. And I think that's probably what the knock-on effects are gonna be of just JPMorgan and Bank of America.

People are just gonna feel safer having their money at one of these bigger banks. And I think that's probably what's gonna happen. - Even though the FDIC thing, I'd never been through or witnessed what happened when a bank collapsed. It blew my mind that in what seemed like 24 to 48 hours, a bank effectively collapsed, was protected, and funds were made available.

If you'd asked me with no context how long it would take a government entity to solve that problem, I would have said months. And then when it was like over the weekend, it didn't even take one full business day. - They almost snapped their fingers 'cause they could see it.

Yeah, it was a social media bank run. It happened so fast. The old story from back in the day, the panic of 1907 was JPMorgan told his bank tellers to count the money out as slow as possible to stop a bank run, right? So people couldn't get their money out fast enough.

And obviously you can't do that today because people can just push a button. So the Fed has to act that fast, I think. That's almost one of the positive externalities of the 2008 crisis is they realized this stuff can happen so fast that we have to step in right away.

We can't let contagion spread and go from bank to bank because that's just chaos. - I was still surprised. No matter how fast they thought they needed to act, I was actually surprised that they could act. Government entities are not known for their speed. - Yeah, they're not handcuffed.

- But what's the average investor right now supposed to do any differently after watching regional banks collapse? Do we change anything? - Probably not. I think it's only like 1% of bank accounts across the country have more than $250,000 in cash sitting in a bank. And if you have that much money sitting at a bank and it's earning the 0.1% that you can get at a savings account at a brick and mortar bank, then you were making a mistake before this.

That was something that should have been remedied before this whole thing happened. So I think now you've seen a huge shift. A bunch of money is going into money market funds, in treasury bills, in online banking accounts. That's the big first step people should have been taking for years is don't have your money sitting in a savings account at a bank because they're not going to pay you anything.

You have to have it somewhere else. In the past, you might've been able to earn 50 basis points or 1% or something like that, which no one really cared about. But now we're talking three, four, 5% because short-term rates are higher. That's the only thing people need to worry about is just if your cash is sitting in a checking account earning nothing, then it's way easier now to earn some sort of yield that you couldn't in the past.

- I want to come back to that yield, but what about from the market standpoint? You've been saying rates are rising. The goal is to potentially create even a small recession to curb inflation. Knowing that's something that the Fed's trying to do, are you doing anything differently? Are you advising clients to do anything differently with their investment portfolio?

- The hardest question to always answer about the markets is what's priced in, right? So we had a big bear market last year where the S&P 500 fell 25%. The NASDAQ 100 was down well over 30%. So was that bear market pricing in a recession already? And has the market already sort of digested this and we already expect there to be a mild recession?

Or was that just we were dealing with higher rates last year and higher inflation and that made the equity markets fall? So that's the hardest question to answer. And even if we do go into a technical definition of a recession, which is all these different checkpoints that the National Bureau of Economic Research creates, by the time we actually know we're in a recession, it's probably gonna be too late and the stock market will have bottomed anyway.

I think that's the hard part about timing of these things is that, especially during a slowdown, the stock market and the economy are never going to fully line up. And the weirdest thing could be, we could go into a recession and the stock market looks over that valley and sees, listen, we've already had all this pain from higher inflation and we've already priced in a slowdown and the stock market may just take off before any of that even happens.

That's the hard part here. Obviously, the other side of it would be, the economy slows more than people are expecting 'cause the Fed went too far and we have this hard landing and the stock market does roll over again. That's always a possibility. But I think you could see some sort of counterintuitive situation where the stock market actually does fine, even if the economy slows, 'cause we've already priced it in.

- It's why I kind of haven't touched anything in my portfolio really for the last handful of years, if not decade, because I don't know. Every time I've tried to catch a falling knife or make a bet that I thought was going to do well, if it wasn't something I really felt like I understood, I've always seemed to regret that decision.

- My general guiding principle is the stock market usually goes up, but sometimes it goes down. And that could be for any number of reasons. I think the stats that I've used are over any one year period, we're up three out of every four years on average. It doesn't follow that exact pattern, but that just means if you were a strategist on Wall Street and you had to predict every year, what's the stock market going to do?

75% of the time, if you just said it's going to go up, you would be right. So I think the people get stuck constantly trying to predict the downside and what's going to cause it. And I think if you just let yourself understand that, I know the downside there is going to happen, but most of the time the stock market is going to go up, corporations are going to make more money.

They're going to pass those profits along in terms of share buybacks or dividends or profits or all these things. Instead of trying to think through the next recession, I think people are probably better off preparing for personal finance as opposed to their portfolios when it comes to recession, because that's way more impactful.

- And what does that mean, preparing your personal finances for recession? - Well, I mean, whether it's a recession or not, if your income is impacted by your current situation and you have a problem for most people losing your job, that's not a recession, that's a depression. That's a huge impact on your whole life.

So just understanding what your prospects are and how safe you feel at your job or how steady your income is. Do you have a fixed salary you earn? Do you have a variable income that could change if things slow down? I think understanding these things, what is your fallback in terms of not only emergency savings, but any sort of other liquid cash that you could tap?

Is all of your cash tied up in your house or in a mortgage, or do you have other ways of accessing cash if something should go wrong? 'Cause we've seen in the past, you being on the West Coast know this better than anyone, technology went from being just bulletproof as an industry and things were going great.

And then all of a sudden, the tech sector seemed to be the only place that was in a recession. And people were losing jobs and trying to figure out what it all meant. I think having that fallback plan is always a good idea, regardless of whether the country's in a recession or not.

Because the economy as a whole can impact you, but a lot of it is personal in terms of what is impacting you and your day-to-day and your own personal economy is a lot more important. - I have a couple of thoughts there, but I wanna ask about the tech recession, if you will.

I know a lot of people were holding stocks that were down 50, 60, 70, 80, 90, close to, in some cases, 100%, not quite there. I've heard a lot of people say, "I don't wanna sell all these things that are down 90% "because when things get a little bit better, "they're going up." My response to them has been, "Yeah, but if you could erase the middle "and look at how have they performed over five years, "it might not actually look as bad "as you feel it is right now.

"If this company is a mess and their stock's down, great. "But with the entire tech industry down, "is that a reversion to normal "or should people still be holding out hope "that it's gonna kind of correct?" - Well, that's probably one of the biggest biases we have, especially when trading individual stocks, is anchoring.

And you say, "As long as I just break even, then I'll sell." Or, and especially this, a lot of people are looking at the higher watermark and assuming that means break even. But that, to your point, you had massive gains for some of those. If you've been in it for five, seven years, you had massive gains running up to that.

And one of the hardest things to understand about catching a falling knife or just holding a falling knife is a lot of stocks just never come back. Cisco peaked in 2000 and still hasn't come back to those same levels. General Electric was the biggest company in the world through the whole '90s and is now down 75% from those levels.

I think the number from a JP Morgan study a few years ago called Agony and Ecstasy said that like 40% of all US stocks going back to 1980 experienced a 70% drawdown or worse and never recovered. Right, so even though the stock market as a whole will continue to charge higher because the new winners will come up and make up for those losers, a lot of stocks just never come back.

And I think that's the hard part to understand. And it's an impossible question to answer. Like, am I being disciplined or am I being delusional? You think I'm being Warren Buffett 'cause I'm holding here, but then you don't know, like, well, wait a minute, this stock is down 80% and I can't tell if I'm being delusional or disciplined.

So I think the first part is just having it so that one stock or that handful of stocks aren't your whole portfolio. You're not so concentrated that it's going to ruin you if it never comes back and you're just sitting there like waiting and waiting. So I think just position sizing and having those individual bets be not your whole portfolio or not a major part of your portfolio, that's part of it is just not being overly concentrated.

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So if you wanna get your personal information removed from all these listings on the internet, go to allthehacks.com/deleteme and get 20% off a plan for you or your entire family. Again, that's allthehacks.com/deleteme. So on one end of the spectrum, you hold one stock, it's down a lot. Like you said, there's a decent chance that stock's not coming back.

On the whole market side, if you hold VTI, you hold even the S&P, you could probably feel reasonably good that it's coming back. How do you feel about an industry, like tech in this example? Like if you were holding a basket of 100 stocks or an index fund focused on tech that's taken an outsized beating, do you treat it more like a stock or do you treat it more like the market?

Probably somewhere in the middle for sure, but you can have a subsector like the energy industry. For the whole 2010s, it was just getting slaughtered 'cause oil prices were coming down, interest rates were low, inflation was low, and as the stock market took off, the energy industry was just doing horribly and tech was doing great, but you could have been in any industry and just gotten crushed.

Same thing if you picked a subsector like regional banks. For the past 10 or 15 years, right, you've made basically nothing even though the market is up three or 400%. So I do think that the tech sector is so much bigger now than it was in the past. It's not a little piece of it like the regional banks are, right?

The fact that it's so much bigger and just part of our lives would give me a little more confidence there that if you're holding the sector, but we saw after 2000, it took the NASDAQ, I don't know, 12 or 13 years to completely come back and that was after an 80% crash, so that was way worse than this one, but there's nothing that says focusing on a whole sector means you're gonna be okay and totally diversified.

It's not like a sector is gonna go out of business, so that's different than holding an individual stock. If you work in the tech sector and you have 100% of your money invested in the tech sector, that's a double whammy potentially and I think having some diversification outside of it for your investments is a pretty good idea.

- That makes a lot of sense. I also wonder at what point we stop calling it the tech sector because it seems like is Peloton a tech company? Is Zillow a tech company? Like there are all these companies that have websites and people interact with them online, but I would actually love to see someone abandon the concept of the tech sector and bundle these companies into their kind of more normalized sector, maybe their sub-sector now just become the major thing and then all of a sudden I wonder how this looks.

- That's the thing. It's like Amazon is, I think, technically considered a consumer company, right, in the way that they break out their geek sectors of the S&P and Facebook is a communications company, not a tech company, so yeah, the way that they've doing it, it is kind of mashed together.

I think if you really boil it down, I think if you included those kind of companies, I think it's probably more like 40% of the S&P 500 is made up of tech companies. To your point, that's a pretty good chunk of the pie, so that diversification maybe is a little bigger than it has been in the past.

- And I think it probably would have helped earlier if we had done it because there'd be companies that I think were getting these valuations and multiples because everyone assumed they were tech companies and then once you kind of peel back the onions, you look at earnings, they're going public, you're like, wait, was Lyft a technology company or was it a transportation company?

Because it was valued like a tech company, maybe it shouldn't have been. And once that kind of all corrected, my unfortunate belief is that the small portfolio I have of some individual tech stocks, I'm not waiting for it to kind of correct as much as it declined. In some ways, I'm kind of in the process of just getting out.

- And maybe one of the ways to answer that question in terms of holding these things, again, because there are gonna be some of these companies that fell 60, 70% or whatever, Facebook is a good one that's already come back quite a bit, but some of these are gonna look like unbelievable buying opportunities in the future.

You're gonna look back and you go, man, I could have bought that stock down 70% or 80% from the highs. I guess a good way to frame this for yourself is, would I be willing to put more money in now? Or if I was starting today from scratch and I'm all in cash, 100% of my portfolio is in cash, would I buy these stocks again?

Because that's the opportunity cost thing that you're always asking yourself, is there a better opportunity out there in terms of investable assets? And if you wouldn't buy those stocks again today or you wouldn't start into them because you're coming from cash, maybe that's a good way to answer how disciplined you should be in terms of holding them.

- And when it comes to that opportunity cost, there's something that I've really been struggling with processing lately, and I'm hoping you can guide me and anyone else with the question. Historically, for at least the last, I don't know, five, 10 years, no one's really ever thought of cash as an asset that would even come close to the kind of long-term portfolio you'd expect from the markets.

But I worked at WealthTrap for a while, you kind of talk about the, is it five to 10? Who knows what you want to call your portfolio's long-term expected return. There's risk and volatility in that number. But with cash at such a high rate right now, is there an argument that should actually be a part of your investment portfolio instead of just the place you park some emergency funds on the side?

- The way I think about this is, what part of your portfolio are we talking? A young person with 100% invested in stocks, and they're going to say, "I'm going to take a certain percentage of this and put it in cash, 'cause it's running 5%, and it's way less volatile, and it's just easy money, I'll clip that 5%." Or do you have a fixed income part of your portfolio where you're in an 80/20 portfolio, right?

You're 80% stocks and 20% bonds. And does it make more sense to take that 20% in bonds and just put it all in cash? That's an easy one for me, like that you could go from bonds to cash. I think that's a pretty simple decision. 'Cause you're earning more in cash because the Fed has jacked short-term rates up so much and long-term rates haven't followed suit.

By going into cash or short-term whatever, you know, money markets or CDs, you take away the interest rate component. So any sort of variability in movements, 'cause if rates rise even more, bonds will get hurt still, right? So if you're in cash, you don't have that interest rate risk.

If you're in a bond piece to cash, that's an easy decision. For me, that's a no-brainer. But if you're going from stocks to cash, now that's hard because now you're really sort of timing the market. And the problem is, let's say we do have this recession. Everyone is predicted.

In 12 months or so, we go into recession. By that point, the Fed's not going to leave rates at 5%. The Fed's going to lower rates. Let's say they bring rates back to 2%. Your cash yield immediately goes from 5% to 2% when the Fed lowers rates, right? So now you're sitting there and, okay, I took 20% out of stocks and I put it into cash.

It was way easier of a decision at 5%. Now it's 2%. Now what do I do? And I think that's the hard part about trying to time it with money that's in risk assets, is I think you have to figure out what your exit plan is. And maybe it's, well, if stocks fall 10%, I'll buy some more from cash and I'll leg back in or whatever it is.

But I think you have to have an exit plan to determine, is this money going to be in cash for a long time or is it just for a short-term trade? And I think that's the hard part, is determining how long that money sits in cash for you. - Let's say I make a rule right now.

I'm like, okay, when rates drop below 3%, I'm putting it all back in the market. Do you think that there's going to be some type of correlation, positive or negative, with if rates do drop from 5% to 2%, is there something that's likely happening in the market at the same time or is it, who knows?

- That's the worry. If rates fall and people decide, okay, the stock market looks better to me, and the stock market front runs it and you miss a 25% gain in three months or something, that's the problem. And then the hard part about sitting in cash and market timing in general is, first, you have to be right twice.

You have to get out at the right time and then get back in. And getting back in is usually harder. And the funny thing is, it's hard in both directions because if the market falls 20% from here and you're sitting in cash, you're patting yourself on the back and you're going, whoo, I missed some of that with some of that cash I'm sitting on, I'm doing great.

But then you become wedded to that cash. You think to yourself, well, it's just going to get worse, right? To your point, you have to have rules in place. Otherwise, you're just going to sit in that cash forever and you're never going to get back in. I can't tell you how many people we talked to in 2013, 2014, '15, who said, I went to cash in 2008, I thought I was a genius, I never got back in.

That's the hard part is getting back in. The other part is the stock market goes up 20% and you see it getting away from yourself and you go, oh shoot, I missed that. Now I can't get back in, now I got to wait till it falls. And what if it keeps going up more, right?

So that's the problem. It's just a psychological game. So if you're going to do that, then I think you have to have some hard and fast rules in place ahead of time. I'm going to put half of this back in if the stock market falls 10% from here, 20%.

Or if the market rises from here, I'm going to dollar cost average once a month for six months or whatever it is. I think you have to have some hard and fast rules because otherwise it's going to play head games with you. - But it does sound like historically rates drop, people think borrowing is cheaper, companies want to spend more, the market goes up.

I'm not going to say you're going to be certainly correct, but if rates do drop to 2%, historically more often than not the market goes up. And if you miss that, then getting that extra few percent for a handful of months or even a year is probably not worth missing out on that swing.

- The good news is unless we have a calamity event, it's not like the Fed is going to go overnight from five to two, right? They're going to go down in a stair-step approach. They might go down in bigger increments if things get really bad, but it's not going to go immediately from five to two.

It could go from five to four and a half to four. It would take some time unless something really gets broken in the economy. - Does that mean that, like you said, unless something really gets broken, we could probably expect these rates at least in the, let's call it two plus percent for at least another year?

Or how are you thinking about how long we might have rates? Or could it be 10 years? - The Fed keeps saying higher for longer, but obviously that all depends on the economy. But I think going back to a 0% world seems pretty far-fetched at this point. That was coming out of the 2008 crisis, trying to get that back up and running again.

And then the pandemic really brought rates to levels that we didn't think were possible. So I think a world of two to 3% rates would make more sense to me for something that's normal, if that is a thing, as opposed to going back to 0%. I do think that makes a little more sense, assuming inflation falls.

And that's the other thing here. If you really wanted to get technical with it, someone would say, "Great, you're giving me 5% nominal rates, but real rates are zero because inflation is 5%. So if I adjust it for inflation, it's 0% anyway. So what am I really getting here?" And that's the problem is if inflation falls, you would expect rates to come down with it eventually.

It's unfortunate that you're not going to earn 5% if inflation is at two. It's probably not going to be that good of a deal. So if inflation falls, rates probably fall too. - Okay. And we're talking about all these rates. We've talked about a couple examples of where to put money.

IBONs were all the rage when you're locking in these really high rates. We still have some inflation, but given the rate hikes for the Fed, is that even a thing that you're seeing people get excited about anymore? - The yields aren't nearly as juicy as they were. They got up to as high as what, over 9%, I think.

They based it on the previous six months worth, right? And so now the yields are 4.3%. And you can get more than 5% in T-bills. You can get well over 4% at a lot of places in terms of online savings or cash management. So yeah, I think the IBONs had their day in the sun.

And I think a lot of people were willing to go through the hassle of using Treasury Direct, which was a website that felt like it was from 1994. And I know a lot of people told me they had problems and you were capped at the amount of money you could put in.

And there was penalties if you pulled the money out early and all these things. It was worth it to jump through those hoops when you could get nine plus percent, but at 4.3%. Now that we're back on par with other things, it's probably not as advantageous. - The way it worked was you locked it in for six months and then it reset based on whatever was happening.

And I believe if you take it out within five years, you get a three-month penalty, but you have to hold it one year. So given where the rates are now, I got to go look at what rate I'm currently locked into. But I think as soon as I hit about three months past a rate under 5%, I'll probably be pulling all the IBON stuff out myself.

- It made sense, but it was a flash in the pan kind of thing. I've seen high yield savings rates anywhere from, there's still your go to chase, you're getting nothing, but in the four to 5% range. But with T-bills and tax treatment for them, is there any argument to not be putting all your cash there in some form?

- It is higher yielding. I've had a lot of people ask me, how do I buy actual T-bills? - Let's ask how you buy it. Is it even worth it or just buy a short-term ETF? - I think ETFs are probably easier 'cause the way it works is a T-bill, because it's so short-term, it could be one, three, six, 12 months, you don't actually get any interest payments.

You buy it at a discount and then you get it at par. So let's say you wanted $1,000, you would pay 900 or whatever. If it's 5%, maybe pay 950. And then in three months or six months or 12 months, you'd get $1,000, right? But there are T-bills that are already out there that are not new.

So you have to kind of check the pricing. And unless you've done it before and used a broker to buy bonds like that, it's probably a lot easier to just hit a button and buy an ETF and go that route. That's what I've decided to do. - And the ETF just pays out the dividends from the fact that they're constantly buying and selling these in that format.

- Yes, it's just much easier. The rates are pretty low. Any Vanguard, iShares, Charles Schwab, all these places, Fidelity, will have short-term Treasury bill ETFs. - And the tax treatment, whether you buy direct or in the ETF, you still get that advantage? - Yeah, so it's the same deal.

I do think online savings accounts have some benefits as well. I find it easier to move money in and out of them. I mean, it's not a big hassle, but if you're trading T-bill ETFs in a relative brokerage account, you need the money, you sell it, then you have to wait two or three days for the money to settle, and then you can pull it out.

And so I think there is a little bit of an advantage to an online savings account in that if you really need the money in like a day or two, it's much easier to get. - Yeah, but if you live in California, if you live in New York, and you're getting hit with seven, eight, nine, 10% tax rates or higher, it seems 5% short-term Treasuries plus the tax benefit, it seems hard to beat.

- It's not a bad deal. - As long as you have money set aside. We talked earlier about the way to prepare for recession. Maybe it's not as much in your portfolio as your personal finances. One thing that I've been thinking is, okay, depending on how stable your income is, right?

Like my income now as a creator is based on sponsor revenue and affiliate revenue. So the market really does take a turn. That stuff cuts quick. Brands are, we're not gonna spend anymore. Budgets are cut. And so I'm thinking about emergency fund in a way that I didn't when me and my wife both had employment.

We had jobs where we were probably less likely to get let go just on a whim. And if we did, we'd probably have some type of severance. Is emergency fund the kind of main tenant of preparing your personal finances for that? And do you ratchet up that number? The more you feel like your job's less certain or how do you think about that?

- I think that makes sense. If you're in an industry where you think it's very cyclical and could have an even bigger downturn, it's kind of like looking at difference between stocks and bonds. If you're a teacher, you know that you're pretty safe in your job. You're pretty solid there.

But yeah, if you're in a cyclical industry, like technology or energy or any sort of variable income stream, maybe it makes sense to have a bigger buffer there or understand where other sources you could pull from in the event that something goes wrong. Do you have a home equity line of credit you could tap?

Do you have other areas where you could pull some money out of? I think that makes sense to just have that parachute just in case. If you're comfortable in the past with six months worth of savings in emergency fund, maybe you go up to nine months or 12 months because it gives you a little bit of extra buffer if you have to make up for that spending shortfall if you stop making as much money.

- One thing I try to remind people is you might know how much you spend. You might track your spending and you might have a good sense and by all means, if you want to maintain that lifestyle in the circumstance that you lose your job or lose your income, you can, but I try to say you could also price your emergency fund as if you made some cuts.

If every year you're the kind of family that takes $20,000 worth of family vacations or whatever the number is, you could probably cut that to zero if you lost your job. So your emergency fund doesn't necessarily have to be, if it's six months, six months times however much you spend in a year.

It could be six months times however much you would spend in a year if you made some cuts. And for some people, there's not a lot of room for cuts. For some people, there might be a lot. - Yeah, if you lose your job, I bet it's pretty easy to figure out those areas of variable spending where you can cut, right?

Okay, this streaming's gone, this streaming's gone, the gym membership. There's probably ways that you can figure out pretty quickly yeah, those places that you're gonna cut back because it just doesn't make sense anymore in your new situation. - Anything else you think on the personal finance side that people should consider thinking about in light of what could happen in the economy and the markets?

- I think especially for young people, it's never a bad idea to always have some conversations going in terms of future employment opportunities and talking to people in other areas of your industry and just having a foot in the door if you need to have that conversation because the whole process of finding a job sometimes can take a lot of time.

So just having conversations, especially if you know that you're not completely locked in and this is my dream job, I'm gonna be here forever. If something does happen, I think just having those lines of communication always open for future employment opportunities is a good idea. - And it's a lot less pressure to have a conversation with a company if you're not trying to actively find a job.

- Exactly. - When you're like, "Hey, I'm looking for a job." It's like, "We're not hiring for this right now." But if you're just like, "Hey, I wanted to connect with someone in the industry." Building that out, someone's gonna build a cool personal CRM for job searching that kind of lets you do this more proactively in advance.

You probably just ask ChatGPT to do it all for you now that I think about it. - Right. - Okay, you mentioned HELOC as a potential thing you could tap. Let's talk about the other side of the equation, right? Rates are high. When it comes to buying a home, I think that people like myself who kind of, I have only been in the market for home buying in an incredibly low rate environment for the last decade.

I know lots of people in my peer group that are like, "I can't buy a home now. "Rates are so expensive. "I gotta wait for them to come back down. "You got two point something. "I'm not gonna pay four or five something. "Is that crazy? "Should people just adjust to the new normal?

"Are they so anchored "that they'll kind of live in stress for the next 30 years "if that's their app mindset?" - Yeah. Unfortunately, so much of financial success is out of your hands at these sort of things where luck and timing plays such a huge role. If you bought a house pre-2021 and had pre-2022 rates, you're in a very good position financially, right?

If you bought in any time in the 2010s or prior, you're doing wonderfully in terms of home equity and having the ability to refinance or have a low rate. If you're buying now, affordability has never been this bad before. If you combine housing prices up 40% since the start of the pandemic with mortgage rates that have doubled off their lows to six to 7%.

And the problem is that I think the Fed assumed if we raise rates and mortgage rates come up, housing prices have to fall, right? Because if we're combining this insane run-up in prices with these newer higher mortgage rates, the monthly payments, it just, for a large percent of the population, doesn't make sense affordability-wise, right?

I'm double whammy of higher prices and higher rates. The monthly payments alone disqualify a lot of people to be able to afford it. Plus you have to come up with a much bigger down payment. And unfortunately, I think a lot of it is probably based on demographics and the fact that we had all these people with 3% mortgages.

The prices aren't coming down nearly as much as people would have thought. Again, in a textbook scenario, rates go up, prices should come down because so many people like us are sitting on 3% mortgages going, "There's no way in hell I'm getting rid of this mortgage. "I'm sitting in this house "and I'm going to stay in it longer," right?

So what we've had is just all the supply on the market has just vanished, essentially. And so we now have higher prices. They've come down a little bit and in certain areas more than others, but they haven't rolled over. I think some people were expecting we're going to see a 2008-type 20% crash in housing prices.

It hasn't happened yet. Maybe if mortgage rates go to 8% and stay there, it'll happen, but it hasn't happened yet. And I think part of that is because all the supply has been sucked out of the market. Anytime there is a house that comes on, there's still all these millions and millions of millennials who want to buy, who miss their opportunity or just weren't ready and the timing wasn't right.

They still want to buy them because supply is so low. Now it's still hard to buy a house because the pool of buyers has grown 'cause they've been waiting, but the supply of houses is down. So it's almost harder to buy a house now. I definitely feel for people who are in that situation and trying to buy.

And unfortunately, I think what's going to happen is if rates do fall, say they go from 6.5% to 5% or 4.5 or whatever, I think that's just going to bring more people off the sidelines. And maybe that'll be a good thing. It'll bring out some sellers too, but we're in a very bad place in terms of if you're a first-time home buyer looking to buy.

If you're someone who's lived in a house and you have all this equity, sure it'd be hard to trade up from a 3% mortgage to five or six, but at least you have that equity to use as a down payment. If you're coming in completely free, and clear of any housing asset, it's a really tough situation.

And your only hope is really, I'm going to buy now and then I'm going to refinance if and when rates fall in the future. That's the hope. - To me, if I were buying right now, it seemed like the strategy to lower your mortgage payment would be to do a short duration, adjustable rate mortgage, because there doesn't seem to be any benefit to locking in today's rates for 30 years.

Does that seem sane? - You probably get a little bit of a better rate on an adjustable rate. And then again, you can hopefully, if rates fell, then you could refinance again at a lower rate. That's the hope. You're rolling the dice that that's going to happen. And in that case, a recession, unfortunately you'd probably be cheering one on because you'd want lower rates from that, which is a weird place to be.

I feel for people who are homebuyers right now, it's a really, really tough situation. And I can't imagine the stress you're under constantly looking and having no inventory and higher rates and higher prices. It's tough. - And is there anything to do other than the strategy you talked about?

- I don't know. It's really difficult. I think you just have to make sure you're ready and that you can handle those payments. And some people are going to have to maybe grow into them. That's a good thing is most people's income goes up over time. The payments are fixed.

You can grow into them a little bit and hopefully refinance over time. If and when rates fall, that'd be the only silver lining. - Now I know in the past, we've ended up in housing situations because people want to buy homes. We want to make it a little easier.

Let people do these kind of interest-only mortgages with giant balloon payments and things that pop up at years out. Is there any world where that happens and people start to get really aggressive or are banks not kind of getting as aggressive as they used to to kind of hold back in that situation?

And for context, there was a time where you could put a very little amount down and you could get an interest-only mortgage, but five, 10 years later, you'd have to start paying the principal. And in many cases, your mortgage payment could 2X. - Yeah, big balloon. - And so your bet was, "Oh, my salary's gonna go up." But many people's salary didn't go up enough to support a 2X mortgage payment.

So I'm just curious if that's a strategy that someone could use or whether banks are even comfortable with that anymore. - That's the biggest difference between now and the 2008 situation and the run-up in the 2000s, is you were getting these ninja, no-income, no-job applications. And now, we've never had better credit scores for people who are buying.

So the people who are buying houses, who've bought houses in the last three to five years, have had much higher credit scores. We're not talking about subprime lenders or borrowers. We're talking about people with high credit scores. They were not doing these adjustable-rate mortgages. They were locking in 30-year fixed rates.

And so the housing market, from a balance sheet consumer perspective, is really, really strong and about as well as a place as it's been. So they're not those problems. And that was why you saw fire sale prices in 2008 through 2012, as the housing market cratered, is people just couldn't afford their payments anymore.

And when they lost their jobs, it was a double whammy and they had to get out of the houses. And that's why prices fell. It would be hard to make a case that prices are gonna rise substantially from here after we've pulled forward so many price gains, but it's pretty tough to see how housing prices could fall substantially because we don't have that situation where people are forced out of their mortgage 'cause they're underwater.

Because even if you ran into trouble, people have a ton of equity in their home, right? Because prices have risen so far. - I love helping you answer all the toughest questions about life, money, and so much more. But sometimes it's helpful to talk to other people in your situation, which actually gets harder as you build your wealth.

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And so if you're on the other side of this, and you're like, you know what? I locked in one of these great mortgages, but circumstances have changed, I wanna move, we need a different house, family's grown, family's shrunk, with such a low rate, is it crazy to do anything other than kind of keep it and try to become a landlord?

I feel like people would be faced with this, I don't wanna give up my 2.75 or 3.25% mortgage right now. Is there any creative way that you can keep that mortgage and like somehow do some kind of weird sell to own kind of situation? - The renting thing is something I think a lot of people did during the pandemic, because they could go from a 3% and then borrow for another 3%.

It's a little harder now because the payment in a new one would be so much higher. My prediction is I think if rates stay high, one of these banks is gonna let you port over your 3% mortgage to a new one. I would love to see that. I don't know how exactly that would work, but I wouldn't be surprised if rates are higher if someone tried that as a sort of gimmick at least.

But unfortunately, there's not much you can do. I think eventually life gets in the way. And we've had this supply shock where the supply and the housing market is just completely dried up. People get married and they have kids and they die and they move and they lose their career.

All the life happens and that's why people move. I moved in 2017 because my wife and I had twins on the way. And we just totally outgrew our house immediately. We didn't plan on moving, it just sort of happened. So I think the housing market will eventually get to a better steady state because life gets in the way.

And again, I think people will just sort of plug their nose and move. I think the number from the Wall Street Journal I saw the other day was people on average have an extra $270,000 in equity above what they had going into the pandemic. And so it would sting to move from a 3% to a 6% mortgage.

But if you have that equity built in that you can use for a down payment to lower what you're going to have to borrow in the first place, I think eventually people will say, you know what, if this is going to make my life easier, I can move to a better school district or a bigger house for my kids with a backyard, or I move somewhere where I'm going to be happier and I can live somewhere else because I can work remotely, all these things.

Eventually that will happen. And I think that you're probably in a much better position than someone who is a first-time buyer right now. - Yeah, I mean, I go back to what you said earlier about anchoring. It's like, this is what the rates are. Like you could dwell on the fact that they're not as good as they were before and hearkens of those times where your parents were like, I used to be able to buy that thing for a nickel.

But at the reality is that's just not the circumstance we're in now and life needs to move on. And I did this great interview with Bill Perkins who wrote this book, "Die With Zero." - Love that book. - And it's really just changed my perspective of like, look, money's purpose should not be to just grow money at all costs.

It should be to help maximize your net fulfillment. If you need a bigger house for your family to be happy, it might cost a little bit more. You might be paying a higher interest rate, but the end of the day, if you don't have the money, of course, that's not a good option.

But if you do have the money, think about what's going to maximize your net fulfillment in life. - We mentioned the HELOC before. Another option is you have to pay 7% now for HELOC probably, seven or 8%, but you could pull some of that equity out of your house and do an addition or something, right?

If you really didn't want to move and you wanted to keep that mortgage, you're gonna be borrowing money, just maybe not as much. You pull $50,000 out of your mortgage or 100,000 or whatever it is, you add that third stall garage or that extra bedroom or fix the backyard up or whatever it is and stay where you are and remodel a little bit using some of that equity that you've built up.

- Yeah, there's a bunch of companies, I can't remember all the names of them, that have made like ADU the most like easy process. Like we will drop ship a container that is exactly a perfect setup, ADU in your backyard. So if you only have to borrow for that instead of have to get a new loan for something else, that's actually a really great option, I like that.

I did an episode with the host from the BiggerPockets real estate podcast. It was yesterday or two days ago. I don't know if it'll come out before or after this, but we talked all about optimizing the home buying experience. We talked a little bit about doing it in this market, renting things out if you can.

So either go listen to that or expect it, depending on whether it's out. - What was their advice? - Their advice right now that I think is probably the most relevant thing is to not focus on the hot homes. It's like there are homes out there who have crappy pictures, who are in a weird place that's not the most obvious place that everyone wants to be.

Look for something that's been on the market for 30 days. Maybe it's on the market for 30 days because the kitchen is completely closed off and has a door. Well, guess what? Moving walls is not that expensive, but there are a lot of people that walk into a house that are like, "Oh, I don't like this layout." And they just leave.

And so it is so much easier to fix a few walls than it is to compete for the hottest home in the neighborhood. - Yeah, figuring out how to not get in a bidding war. Look for something that's been on the market for a while because those people will probably be desperate to sell as well 'cause they've probably been sitting there wondering, "Is this gonna happen for me?" - Just like you said, now might be a good time for renovation.

The big takeaway I had for people right now is you don't have to necessarily buy a plot of land and build a whole house, but maybe you could buy a house that's not exactly what you want and the amount you'd have to put into it might be net total less than what it would cost otherwise.

And so that was their advice. But the building thing, if you can, is actually not a bad idea because that's where you're getting a lot of the breaks now is the builders, they're not in the position to sit back like us with a 3% mortgage and just wait it out, right?

The builders have this land that they need to build, so they've been offering incentives where they'll buy your mortgage rate down for you. So if you have the money to build, you could be more like a 5% mortgage 'cause the builder wants to get that done and get it off their books where they'll buy it down from 6 1/2 to 5 1/2 or five and offer some incentives for you to build as opposed to buying something that's already there.

- I don't think I know anyone who's even bought and built, so I don't know anything about that process. - It's not a fun process because there's a million things you have to pick out, but whatever, you get a new home out of the deal. - And you mentioned HELOC's rates going up.

Anything someone should be doing if they have other kinds of loans right now with rates up, student loans maybe? - Well, the big one is probably auto loans right now, which I think the average is like 8% on an auto loan. And that's another place where prices have risen.

So if you could hold out on buying a new car, now is about, I mentioned that it's a really bad time for a first-time home buyer. It's a really bad time to buy a new car because they still haven't figured out the supply chain stuff because of a lot of the parts coming from overseas.

But if you drive by a car dealership, you'll see that there's still a lot of empty slots where cars should be, right? And with 8% rates and used car prices high, it's not a great time to buy a car. So if you can make your car last a little longer, try to wait it out an extra 12, 15, 18 months.

If you can, that's not a bad idea because going into a new loan, you're getting three or 4% car loans back in the day too, right? Now we're talking eight, nine, 10% sometimes for an auto loan. So if that's something where your car can still make it, but you really want a new car, it's probably best to wait it out at this point.

- It's wild. I'm looking at the credit union that we got our auto loan from right now, and it's at 7.99%. I will say, do please shop around for auto loans. It is absolutely crazy how much of a better rate you can find looking at a ton of credit unions all over.

I scoured the internet. There's this crazy spreadsheet that some Tesla enthusiasts created with like all the rates from all the credit unions. I found a diamond in the rough, and I'm actually looking. We got our loan June last year at 1.99%. - Yeah, and credit unions are a great place for that too.

- You don't have to be a member of a specific credit union. You can almost always find some way to join them. There was one credit union I remember, I think it was the Christian Community Credit Union, that had the best possible rate when we bought a car five years ago, but you needed to submit evidence of tithing to one of their member churches.

I was like, okay, that one I can't. That one, I was like, I would just not feel good trying to meet those requirements. It would cross that ethical boundary for me. For many other ones, you need to just join, or maybe in Palo Alto, the Stanford Federal Credit Union, you can join by making a $5 donation to the Palo Alto library.

In student loans, is there anything someone with student loans right now needs to be thinking about? I don't know a lot about how student loans function in kind of fluctuating rate environments, but I figured I'd ask. - Well, people in the student loan, they've been able to basically put off their payments for so long because of the pandemic.

So that's something that's probably just coming back online for people, is making their payments again, 'cause they had the ability to put off those payments because of the pandemic. So I think that's something that the delinquencies for student loans is on the floor right now, because most people weren't paying them through the pandemic, and now they have to put their payments back on.

So that could be kind of a shock to people that they put those payments on hold for a while, and now they're coming back. So that's probably the bigger thing, as opposed to the rates, is people just having to make payments again at all. - Okay, I got one question from a listener about something related to investing that I wanted to ask you, or at least read to you, because I feel like you could do a better job answering it.

So Daniel said, "How do you estimate risk and potential upside?" He says, "Personally, I always calculate the risk "as a potential loss, as a percentage of my net worth. "I do the same with the potential upside. "Helps me kind of quantify the potential impact "of the best and worst case." What do you think?

- It is way easier to predict risk in something like the stock market than it is to predict returns. I think because you're pretty sure that in any given year, you're probably gonna have a correction. Every three to four years, you're probably gonna have a bear market, and then maybe once every 10 to 12 years, you're gonna have a crash.

You can't really set your watch to it, but that's pretty darn close, that risk is there. But if you look at, over time, the different decades, the first decade of the century, the stock market went nowhere. The second decade of the century, we had huge returns. The '80s and '90s were these huge returns.

The '70s was a terrible decade. '60s was okay. '50s was awesome. The '30s and '40s were terrible. And so, it's much harder to predict because of the unforeseen things that can happen that could cause things to be worse than you would assume. So, I'm much more of a fan of trying to predict risk ahead of time than return and sort of being surprised on the upside.

But I think you can look at the historical range of results and understand that, over the long-term, corporations grow their earnings by whatever, 5% or 6%, and dividends grow by 4% or 5% per year, and sort of get a good estimation of the long-run returns. But unfortunately, in the short-term, it's basically impossible to predict what the stock market's gonna do.

That's one of the reasons that I think you're able to earn such high returns there is because it is so unpredictable. I wish I had a better answer for you, but it really is difficult. And going down to the individual company level is probably even harder. The only last thing I was gonna ask you before we wrap, you have a segment on your show, which I'm a regular listener.

We both release on Wednesday mornings, so every morning, I'm like, "Oh, I got mine out. "Now I'm gonna go listen to Animal Spirits." You do a lot of recommendations. You focus those on books, movies, shows. But I did wanna ask if you had any recommendations for people that are interested in the personal finance, the investing side.

Are there any services that you use, whether it's tracking things or modeling things or following earnings reports that you think are cool things people should check out? - The funny thing is is when it comes to personal finance apps, I'm pretty old and stodgy where I still track everything on an Excel spreadsheet.

I never got into any of those tracking services. 99% of my spending is on a credit card, and I feel like I just kinda can track it that way through the credit card, and that makes it easier. I was joking with my, I saw my parents this past week, and my mom still had a checkbook and was balancing her checkbook, which I thought was just the most antiquated thing I've seen in my life.

But I never got into too many of that things. On the investing side of things, one of the new apps that I've been using lately to pay more attention, this started off for the podcast just to be more informed and ended up becoming an investor in the company, but it's called Quarter, where you can listen to company earnings calls on an app like you're listening to a podcast.

And you can listen to it at two-time speed, and they give you a transcript, and you can also get the reports. And they have a button where you can skip all the CEO and CFO mumble jumble and just go right to the question and answer from the analyst, which is pretty cool if you don't wanna listen to all that.

I have a handful of companies that I listen to, and it just gives me a good sense of what's going on in certain markets or just specific industries. And I feel like that's a pretty good macro gauge to hear how things are going from the horse's mouth. - And what about when someone's like, "Oh, how has XYZ stock performed over the last year?" What's your default website to pull up that chart?

- So I have a lot of subscription things because of my job in Wealth Management. So I use Y-Charts for most of that stuff for charting. That's a subscription service, but there are free ones out there like Coifin, which is pretty good. I still think Yahoo Finance is not bad.

Remember, Google Finance was really good for a while and they kinda just-- - Didn't do anything? - I don't know, a few years ago kind of shut it down and just made it worse. There's also good backtesting tools if you wanted to backtest an asset allocation or portfolio. There's Portfolio Visualizers, always one of my favorites, that you could backtest specific ETFs or mutual funds or asset classes to see how performance would have been if you wanna kinda test out a portfolio.

- Okay, that's helpful, awesome. Ben, this has been awesome. Thank you so much for coming, and I really enjoyed it. - Yeah, this was fun. (upbeat music) - I really hope you enjoyed this episode. Thank you so much for listening. If you haven't already left a rating and a review for the show in Apple Podcasts or Spotify, I would really appreciate it.

And if you have any feedback on the show, questions for me, or just wanna say hi, I'm chris@allthehacks.com or @hutchins on Twitter. That's it for this week, I'll see you next week. (upbeat music) (electronic music) (electronic music fades)