Hello everybody it's Sam from Financial Samurai and in this episode I want to talk about the Paycheck Protection Program again because I'm on record as saying it's the best economic rescue package I've ever seen. It's impactful, it's a lot of money and I think it's gonna make a big big difference as millions of small business owners get their PPP loans that will ultimately be forgiven.

Now I'm always trying to figure out and discuss what are some downside risks because I do believe there's gonna be a recovery in the second half of this year and based on my previous podcast I did talk about buying the dip. I wasn't a seller of the dip I was a buyer of the dip because I think things are gonna improve and they have so far but nothing is ever over and I'm always trying to make sure that okay what am I missing in terms of my investment thesis because the ultimate goal is to try to make money or outperform the markets.

My ultimate goal is that continue to grow my net worth every single year in a risk-adjusted manner and I hope the same thing is for all of you. So regarding the Paycheck Protection Program we know that it's now about six hundred sixty billion dollars. Initially it was three hundred forty nine billion and then they had the PPP package two so it's up to six hundred sixty billion dollars.

We also know that successful loans are being distributed right now and if you get that money and you pay your people the same and you keep the same amount of employees the same for eight weeks after you get the money, theoretically the government has said they will forgive that entire loan.

So it's like free money if you follow their rules. However I was talking to my wife the other day and we kind of got into a little bit of an argument because she was saying well I'm not so sure that those loans will be forgiven. So I had to go back and look at the post that I wrote on PPP and look at other articles and basically argue with her and say well why wouldn't it be forgiven if they follow these rules unless the government is lying.

What is the intention of the government to give this PPP money? The intention is to inject money into small businesses which employ almost half the working population and to get people employed and stay employed or to get people hired back because small businesses can hire back employees within eight weeks or by June 30th and keep them at the same pay rate to get their PPP money forgiven after eight weeks.

But what happened in this conversation with my wife is that she gave me doubt. She gave me doubt that businesses might not spend their PPP money because they are unsure about whether the government would forgive these loans or not because really nothing is for certain until the money hits the bank and until the government says okay you're good to go.

There is never a hundred percent certainty in anything really in terms of investing, in terms of getting free money. There's always probabilities. You always want to think of probabilities. I think the probability of getting the money, the PPP money forgiven if you follow all the rules which are clear but not crystal clear is about 95%.

It's only a 5% probability that the government reneges on its promise. But that reneging of the promise is what makes me a little bit fearful. My initial thought was why wouldn't every single small business apply for the PPP loan? It's free money if you follow their rules. But as I got to thinking and talking to other small business owners it's just not the case.

55% of small businesses in the CNBC SurveyMonkey survey opted not to apply for PPP loans and 71% did not apply for an economic injury disaster loan. And what would the reason be for not applying for free money? Well I think it's many small business owners just didn't like the model and knew they could not abide by the rules to get the money forgiven.

When I published my Paycheck Protection Program post I had a lot of back-and-forth discussions with very intelligent readers saying my calculations were wrong. You can't get more than $8,333 times 2.5 per employee for the PPP loan and so forth. I mean these were readers who are lawyers and bankers because there's so much confusion and even bankers that I talked to who were doing these PPP loans didn't know for sure.

But the end result is you could get actually more than $8,333 per employee times 2.5 because 75% of the PPP loan goes to payroll and another 25% can go to something else. And the cap is $100,000 annual income per employee to do the PPP calculation. So yes I might have just lost you here but that's the point.

It is a little bit confusing and even the smartest people that I know in the business don't even know exactly what's going on. So on the one hand, the bullish hand, more and more businesses are getting their PPP money. Now only supposedly 13% of the 45% of small businesses who applied for the PPP were approved as of early May.

Among all respondents 7% already received financing and 18% are still waiting for a response from a lender. So this is not that encouraging of a number but if you look at the positive side that means a lot more businesses will get their money over the next 30 days and every single business that gets their money is gonna feel great.

They're gonna feel like they won the lottery and they're gonna be able to retain or hire back employees that they lost during the lockdowns. This is incrementally positive and this is what the the stock market is assuming. Now on the negative side which is what I'm alluding to in this episode and the discussion I had with my wife is the confusion.

The confusion already has eliminated about half the small business owners who did not even bother to apply for the PPP loan because they knew they wouldn't be able to follow the rules to get the loan forgiven. Now what about the half who did apply and they're gonna eventually get the money?

I bet there is a good percentage of these small businesses who are gonna be too fearful. Too fearful of spending the PPP money because they're thinking about a scenario where they're thinking okay let's spend the PPP money on employees and then 25% of the PPP money goes to rent and mortgage and whatever else to run the business.

What if we spend that money let's say you get $100,000 you spend the money and then eight weeks later the government's like okay let's see how you spent the money. Did you follow instructions or not? And you think you followed instructions but the government said well you actually didn't follow the instructions so we're only gonna forgive 25% or 50% of your PPP loan.

Now the business might be thinking oh man we're kind of screwed we spent this money our revenues ticked up a little bit but not as much as we had hoped and now we have debt. We've got 75% of that PPP loan is that or 50% of the PPP loan is that or maybe we have a hundred percent of the PPP loan as debt because we didn't follow the instructions properly.

So in that scenario you can see in a couple months right maybe in June or July probably July or August that some businesses might be in further trouble because not only did their revenue stay flattish or not rebound as much they actually have more debt. So I think a rational business would be very cautious in spending their PPP money.

They would set aside other money that equals or surpasses the PPP money to pay back any kind of PPP money that's not forgiven. So you can see how at least a small percentage of businesses let's say 10% are gonna be continuously very conservative after they get the PPP money and this is going to translate into disappointing earnings and under delivering on expectations and when you have disappointing earnings and under delivering on expectations which hopefully have been lowered over the past two months you're then gonna see a decline in the stock market because the stock market is basically a valuation on earnings and future earnings growth.

So in conclusion I just want all listeners to be aware to watch out for things that are not going to happen as expected. We've experienced a fantastic rebound in the stock market and I think the expectations are very high now that things are gonna get much much better but like everything it's all about under promising and over delivering and it feels to me like the expectations are now too high for a strong recovery.

So I personally am de-risking. I think the easy money in terms of the rebound money has been made in the stock market and I'm looking elsewhere for opportunity and I think that opportunity is in the real estate market because it lags on the way up and also lags on the way down.

So I think there is opportunity if we go about and look aggressively and I'm going to talk about it in a future episode. Real estate is my favorite investment class to build long-term wealth and I want all of us to be vigilant in looking at scenarios in the next one or two months that could disappoint expectations.

We know that PPP could disappoint expectations in terms of what the government and investors think on how small businesses will spend their money. We've just got to keep on looking at what else could disappoint expectations. I mean there's earnings growth for publicly listed companies that are coming out right now for the first quarter and there's guidance for second quarter and beyond.

Many companies are just not bothering to provide guidance and you know what maybe I wouldn't too because it's so unpredictable what's going on. And there could be other disappointments in terms of unemployment benefits or maybe there's expectations about a second or third ongoing stimulus check or universal basic income.

You just have to be aware as an investor what the expectations are and what the reality is. So thanks so much everyone. Stay safe, Stay vigilant, and if you like this podcast, I appreciate a positive review and share it around.