The Biggest Rug Pull of Our Lives (EP.332)

22:50For those with the worst credit, rates are about 14 % and 21%. And you've seen those commercials, right? Like we don't care what your credit score is. bring your old junker here. We'll give you a thousand dollars for it and give you a loan. That is, that is exorbitant rates. That is brutal. All right. The wall street journal had a piece. This is, this is like, if you think through like interest, like interest sensitive parts of the economy. And I talked a couple of weeks ago, how we know someone in like a loan department who was just like, I'm, I'm screwed. So the mortgage industry employment has already declined 20 % to 337 ,000 people from 420 ,000 in 2021.

23:23Uh, they anticipate a further 10 % decline. this is mortgage bankers, brokers, loan processors, but not real estate agents, which I'm sure real estate agents are just, we always talk about how there's more agents than houses. I'm sure there's a lot of people who were part-time realtors that are not anymore. I have that number because we double dipped. I put this in the real estate. Oh, okay. So the number is, well, let me just read the lead in here. Oh, wait, this is a different one. The mortgage is so bad, lenders want their bonuses back. Is that a different article? No, that's the same thing.

23:58That's the same article? Okay, so here it is. So David Siegel went to work for an affiliate of guaranteed rate in 2021 and got a signing bonus of more than$100 ,000. Now, remember, 2021 was obviously just mania for real estate market. Interest rates were super low and mortgage bankers were raking in cash. Now that business has dried up, the mortgage company wants its money back. He said it fired him one month shy of the date when it could no longer ask for the bonus back then, demanded the money. Guaranteed rate and its affiliates are also telling hundreds of other former employees that they have to return their signing bonuses.

24:29So the industry, mortgage industry employment has declined 20%. I think you said that earlier. Yeah. The average loan officer closed 3.45 loans last month versus eight in the same month of 2020. This is a wild one. The mortgage market used to be Steve Walsh's cash cow, But now it's squeezing him on both sides. Business at a Scottsdale, Arizona mortgage brokerage is down about 90%. So depression. He said, and headcount has fallen. And honestly, that makes, he's not alone on that, I'm sure. I'm sure that's tons of these places. Headcount has fallen to seven from about 25 at the end of 2020. To save money, Walsh wants to downsize, but he has been unable to sell a 7 ,700 square foot house at the$3 million he's asking.

25:10We got the rug pull of our lives. Everyone did. Rates are not supposed to be here. Average retail loan officer payment per month. So it dipped in 2020. Then it skyrocketed. It goes to$25 ,000 a month. And then it's crashed since then. So it was at like$12 ,000 in 2020 during the bottom. Then, yeah, to Ben's point, it went to$25 ,000. So more than doubled. And now then it crashed to$7 ,500. Yeah, it says average monthly pay in September was down by more than half from three years earlier. So these people have been on the roller coaster. and to your point about getting used to new salary, I'm sure there were a lot of people who said like, this is going to last forever.

25:50This more money I'm making now is going to be here. Like you do feel like we're in like a mini depression if you're in this industry, right? No, it's not mini. Well, true. Yeah, but I'm sure a lot of people have been laid out. It's, yeah, it's, so this is the kind of thing, like if you're an interest rate sensitive industry, you are feeling tons of pain right now. And I don't know when that is going to subside. I'm sympathetic to people that have, that are really struggling seeing tweets like the economy is on fire. The economy is real accelerating. Cause how could they see that and not be like, you.

26:29Right. We're looking at the data. They're looking at anecdotes. And if your, your personal economy is all anecdotes, you don't care what the rest of the economy is doing. It's all anecdotes. So I, I get it, but it's also like, it's also okay to look at the aggregate, to understand the trends, how things are going. Like that's - It's almost impossible to say the economy is fine and I've never been in a worse situation. Like that is really damaging to your psyche. Unfortunately, like you feel like a jerk saying it, that's always gonna be the case. There are always gonna be people losing no matter, there's always a bull market and a bear market somewhere.

27:00And it sucks that that's the way this system works, but - But I think the situation is amplified in today's economy. It is a weird economy. where the economy and the aggregate is strong, but there's pockets of recessions and depressions. Yeah, unfortunately. All right, so as of last Friday, the S &P 500 was in correction territory, down 10.3 % on the year. I always look at these intra-year drawdowns because I think this is interesting. So six out of the past nine years, we've had a double-digit peak-to-trough correction intra-year, right? 2015, 2016, 2018, 2020, of course, 2022, and then 2023.

27:34I talked to Jeremy Schwartz last week on Ask the Compound, and we had an interesting discussion before. and in 2020 and 2021, the people who were mad about the stock market were saying, everything is going up. There's nothing worth buying. This is crazy. And now it's like, whoa, wait, everything is going down but seven stocks. There's nothing worth buying. And it's like, you can't have it both ways, right? If the stock market is going up and 95 % of the stocks are going up and it feels like this is crazy town, I can't invest in stocks. Sure, I understand that. But you can't say now everything is going down.

28:07This is the blood in the street things. And the thing that people are contorting their brains into pretzels about is, well, this time is different, okay? The Fed is raising rates, and we've got$12 trillion of government spending, and World War III is coming, and all these things. And people, every time there's a correction, people try to talk themselves out of it being an opportunity. And I'm not saying like, oh, generational buying opportunity, but like, small caps, look at this small cap, Mike Riccardi said fourth time in the last 23 years that Russell 2000 has been in a 33 % drawdown. Look at these forward PE ratios of the S &P 500 versus the S &P 400 and 600, which is large caps versus small caps and mid caps.

28:45Dare I say small caps and mid caps are approaching like screaming buy levels. Is that overstating it? I don't think so. And this is a wonderful, I'm not trying to just roll. You're not calling a bottom for the next 35 years. This has been a, so people are saying, well, the stock market hasn't gone anywhere for two years. That's correct. It's been volatile. This is a wonderful market if you're a dollar cost averger. Yeah. Right? And some people don't want to hear that. Which a lot of our listeners are. Yes, if you're dollar cost averaging, this is a great – so for my personal portfolio, since the pandemic, the way that I try to rebalance and sometimes over-rebalance is through new contributions.

29:22And the thing that I put more money into than anything over the past three-plus years is small-cap value stocks. Because they're trading at like eight times earnings or something. And the earnings yield on that is unbelievable. like 10 % earnings yield or something, right? I don't know if all these companies are going to go out of business, but if I'm slowly but surely putting money into these stocks, I'm pretty sure over the long run, I think I'm going to do okay. That's the hope. Like, this is the whole point. Like, Warren Buffett didn't say, be greedy when others are fearful, except when government debt is at this level, and except, like, right?

29:57There's always going to be an except. So, like, this, you know, U.S. stock returns are too high. Okay, buy international stocks. International stock returns are too low, though. It's always something, right? And I think like going forward, if you have a more like diversified portfolio of small caps and mid caps and international stocks and US stocks, and I think you have like the technology stocks still to like, in case the AI thing takes off, like I think you're going to be doing okay from here. You know how every single behavioral finance book, like every single one talks, has some sort of mention, about our ancestors in the desert.

30:37Yes, on the savanna, running from the tigers or whatever. But it really is true. It really is true that we are hardwired. Our entire lineage of ancestors ran away from danger to stay safe. And so it is in our nature to protect ourselves and to protect our money. And that is a really difficult thing to overcome them because all you see is risk. And I'm sort of the, I mean, I don't want to say I'm guilty of this. I'm a human being. Everybody is right. There's no, there's no, uh, there's, there's no reward for like being naive to risk and just acting like there's nothing wrong. Right. True. Yes. And obviously like it, it feels bad that the stocks that I own have been going down and not being going anywhere, but honestly, like two years worth of dollar cost averaging where the market goes nowhere in 10 years, that's good.

31:30You're gonna look back and go, Oh man, man, that was great. I got to keep continuously buying at lower prices. The best way to overcome that thing that I just described, the temptation to protect yourself, i.e. reduce your stock exposure, go to cash, whatever, just automate it. And most people do, right? Thank God we have the ability to just every two weeks, out of sight, out of mind, buying stocks. It also depends what type of person you are. So they had this great piece in Barron's and they interviewed Seth Klarman and Peter Lynch, two titans of the investment industry, like two of the greatest track records in history.

32:10And Klarman says, Klarman, who is more of a macro guy, the market is scary and vulnerable. The geopolitical strains seem heightened rather than clearly. I think in some ways, the magnitude of the disaster of the Fed holding rates at zero for a decade is now much more clear. Macro guy, generally bearish. As for Lynch, he says, we've been in an incredible bear market for two years, except for 10 big stocks. Stocks are almost always are almost selling for less than cash. Look at the Russell 2000. Is he bullish on the Russell 2000? Absolutely. I love it when stocks go down. I think this is this is like the different mindset.

32:40And I think if you listen to the macro guys, they're literally always bearish. We did this Seth Klarman one before, where in May of 2010, he said, I'm more worried about the world more broadly than I've ever been in my career. And I'm sure in the 2010s, his returns were fine. But the macro guys are always, this is Stanley Druckenmiller. If you listen to his soundbites, he's always bearish. If you looked at his portfolio, I'm sure it's completely different than how bearish he is. That's a great point. So the macro people versus the stock market people, I think it really depends on how you look at the world.

33:11Totally. Hey, Sean just sent us a tweet. Somebody tweeted, Joey Politano, Point of view, you posted it. Go to Slack, Ben, so you can see this. You posted a chart of median real insert data here. I retweeted that. It's perfect. You saw this? Yeah. It's great. So it's somebody, and it's just like they're in hell, I guess, and they're being attacked. And it's all the comments that we read from Liz Ed's others. It's pretty perfect. OK. Let's talk about housing. OK. I've been seeing this chart go around a little bit. The current mortgage rate versus the effective mortgage rate, which is essentially the effective mortgage rate is like the average of everyone who's holding a mortgage rate already.

33:49Current rate is obviously what people are paying now in the market. And there's a massive divergence. I think you have to go back to like the late 1970s to see this type of divergence between what homeowners hold and what the current mortgage rate is. And again, this is another group that I think out of everyone that deserves to be angry over the past few years, young people probably deserve to be the most. I think young people got really screwed during COVID with schools being shut down. And that's like, if you missed out on like your last couple of years of college because of COVID, I can't even imagine that situation, like the once in a lifetime opportunity.

34:21And then, you know, job market is great, but like good luck buying home. I think young people deserve it a little bit. So I'll give them, so Bank of America also shows that they broke it down by generation. And they said, except millennials, percentage of change in mortgage debt since Q4 2021 by generation. Boomers is unchanged. What's traditionalist? Is that silent generation? That's a new one to me. Gen X is up 10%. Millennials are up like 20%. So that means millennials are the ones taking out the loans these days. And their change in mortgage debt has skyrocketed, which makes sense. That's why there's still demand for homes, right?

34:57Because millennials are in their household formation years. So kind of been getting screwed here. Yes. I mean, obviously the hope is you're going to be able to refine it. Boomers had to pay way higher mortgage rates in the 80s too. They refinanced the whole way down. That's the hope. The good news is that people that are in a home, they're having no problem paying their mortgage payments. The share of U.S. borrowers, this is from Calculator Risk, the share of U.S. borrowers who are in serious mortgage delinquency, so that's 90 days or more, dropped to 0.9 % in August. That's the lowest recorded since January 1999.

35:32Wow. So thank God, at least people that are in a home are having no problem paying for it. Yes, and it's hard to see that changing in a drastic way. anytime soon with how many people have low rates locked in. Maybe in the future, but not for a while. Here's an interesting chart from Bank of America. Over half of 65-year-olds and older have not moved this century. Man, that is pretty insane. I feel like, again, for young people, that's going to be different, I feel like. Unless they're just all locked in. What do you mean? Young people are more apt. I feel like baby boomers were way more patient with sitting in their houses than young people are.

36:10Here's another one. Home equity accounts for almost half of median net worth of homeowners 60 and older per Vanguard. The average retirement savings, meanwhile, was$223 ,000. So like people are going to have to. But this goes back to my point. I don't think people feel net worth when all of it is locked up in housing. Okay, so a lot of people said this. Sure, my house price went up, but I don't feel wealthy because higher rates make it so I can't access that wealth. You know what? I think that's a good thing. If people were able to easily access the wealth in their house, they would blow through it.

36:42Housing is a, like the fact that it's illiquid and it's hard to access, I think for most people, the fact that that's why it makes up half of their median net worth, because it's not easy to access. And I'm sure, again, there's gonna be companies that figure out how to tap it in the coming years, probably. But I think for most people, that helps them build wealth. It forces them to have a longer term asset. I don't disagree at all. I'm just saying, that's why I don't think the median net worth numbers really have any bearing on how happy people are or should be. All right, let's do some quarter stuff.

37:15So Visa, here's a quote from Visa CFO. I feel like the credit card CEOs and CFOs say the same thing every quarter for the best three years. Like everything's fine for our customers. That is weird. Companies are fine, but people are pissed off. Yes. At least Fortune 100 companies. Corporations, yes. The S &P 500 companies seem to be fine. All right, so Visa CFO. As we said consistently, we're not economic forecasters. And so at a macro level, we are assuming no recession in our outlook. Consumer spend across all segments from high to low spend has remained stable since March. Our data did not indicate any behavior change across consumer segments.

37:54Here's Amex. By the way, I rely on the transcript for a lot of this. I mean, I do listen to a lot of calls on the quarter app. They're very good at pulling the best stuff. I did not listen to Visa or Amex. So that's the transfer. They have a great sub stack. But this is also why the personal interest payment stuff is rising, because people are still spending with their credit card. And if they're not paying them off, guess what? Those rates are higher. So here's Amex. If you look at our delinquency rates, they're fairly flat. If you squint a little bit, you're going to see a couple of basis points increase.

38:22All right, not much there. Net charge-offs of$931 million increased$62 million from the second quarter. Again, that's not really much. The increase is driven by credit card losses as higher late-stage delinquencies flow through to charge-offs. For context, the credit card net charge-off rate rose 12 basis points in Q3 and remains below the pre-pandemic rate in the fourth quarter of 2019. Net charge-offs are below where they were in 2019. How about this for a hot take? I've been thinking about this. would it actually be better for the consumer in the long run if we just go into a minor recession sooner obviously recessions are bad people lose their jobs but i feel like the longer this boomflation whatever continues the more people are going to tap into credit sources the more they're going to spend down their savings it's almost like if you've got a recession people would hunker down a little bit and it would maybe change their behavior whereas if we keep this growth going, people are just going to get into a, dig themselves a bigger hole.

39:29Does that make sense? Or am I looking at it two things the same way? Yeah. And I hear what you're trying to say. I don't know. I would have no way of proving or disproving, but it seems reasonable. All right. Bucco Capital tweeted, any good reading out there on why all Fentech is trading like it's going to zero? What's an example? Square. Like a firm Square. Yeah. I did see that. PayPal. Joe Weisenthal tweeted something the other day that Square bought a company for like$29 billion. And they're worth$24 billion now. Yeah. So Mark Rubenstein, another great sub stack. There are so many sub stacks, by the way.

40:03And I feel like they keep coming. And I feel like I pay for almost all of them because I like to support these people. But it's becoming a lot. Yeah, there are. It's hard to keep up with them. We got to rebuttal. Okay. Put it all Netflix, sub stack, all that together, right? Rebundle. So this is an interesting thing that I hadn't considered. Well, I mean, obviously the easy is like a firm in those companies that were based on 0 % rates, not lasting forever. Like that, those business models never make sense. And then payments getting disrupted by like just Apple coming in and just be like, you know what?

40:38We're going to do this too. Right. And like there's Google Pay. I think even Facebook has a pay. I think Shopify has a pay. You can pay with anything. Amazon Pay. All right. So Mark Rubenstein wrote, subprime risk is now held by fintechs, not big banks, which is interesting and not a minor detail.

41:00Oh, and then here's a quote from the CEO of Equifax. Again, getting back to the subprime thing. So subprime has been challenged for a year. And by the way, subprime risk is now held by financials. I'm not going to read the whole article, but that was a big part of Mark Rubenstein's sub stack. Okay, back to Equifax. It's not like it was in 2007 or whatever. Yeah. Subprime has been challenged for a year. That's generally subprime businesses with the fintechs. Most of the big banks don't do subprime business, and that's been challenged for a year. As I mentioned earlier, starting to comp against fairly low levels.

41:33I would expect subprime to stay high as we go through 2024 because those consumers are really more challenged, not around being unemployed, but around inflation is still pressuring them. That makes sense. So a firm is down 90 % from the highs, but this is still a$5 billion company. How is that possible? What am I missing? Maybe there's something I don't know about them, but just from the surface, are people still just doing those, I'm going to pay$20 a month for four months for this$80 shirt or whatever? You ever find your$200 shirt? No. Still didn't find it, huh? Not happy about it. Okay. I don't know why or what's gotten into me, but I've noticed myself, I found myself wearing cologne for the first time in, since high school maybe?

42:19No, probably since. Yeah. You don't seem like a cologne guy to me. I haven't been for 25 years. I don't know what's gotten into me. Okay. All of a sudden, I'm doing a little bit of spritz. I just won. Seinfeld has a good bit on cologne. What's the bit? When it was coming in the car's getting caught. I just, just like, you're trying to smell better for yourself? Like, who is it for? Yeah, I don't know. I don't know. I do like smelling better. I wore cologne in high school and college. But yeah, I think after college. You didn't want to be the cologne guy at work. In the office, if you walked out of the bathroom and you smelled cologne, you're like, who's the jerk who's wearing cologne and leaving it everywhere he goes?

42:54That's a good point. I don't know if I wear it to the office. I don't think I wear it to the office. But I wear it when we got to dinner. Okay. Yeah. I was a cologne guy before. I gave up on it when I was like 25, like a normal person. It's a middle-aged thing? Middle-aged thing? Okay. All right. So we kept this episode relatively short because it's Halloween and I have to run to Kobe's parade. All right. So are you watching the fallout? How shall usher? On my list. What do you think? I'm on episode. I'm on episode four. I'm having trouble. I find a time to watch with Robin. You have to show cheat on her.

43:34No, don't do that. I'm not a cheater, but I don't know. We've just been having trouble coordinating schedules. So should I watch it? Yeah, it's good. Okay. So Kobe like found a – he has like a giant squid stuffed animal that he got from the aquarium and all of a sudden like resurfaced. I'm like, oh, where did you get this? So he's like the aquarium. So he's asking me to show him like – he wants to see pictures of giant squid. So I'm Googling it and of course because giant squids are like so rare and they're so hard to find. There's just not a lot on the internet. So I'm like, I have an idea. I'm going to show him the scene in King Kong Skull Island of King Kong eating the giant octopus.

44:13Okay. And he was super into it. And so the next day we watched Kong versus Skull. I feel like our sons would get along. That's exactly the kind of stuff George likes to watch. Well, Kobe loves the – I mentioned this a few episodes ago. Like the animal – like the spider versus tarantula book, the crocodile versus lion, the shark versus this, whatever. They're like these little books in the library that he likes to read. Who would kill who? and so maybe not kill is too strong a word. Who would win in a fight? He doesn't know about... Well, actually he does. So we're watching King Kong vs. Godzilla.

44:45King Kong vs. Godzilla. And at the end, Godzilla's beating up King Kong. Logan turns to me and goes, is King Kong crying? It was very sweet. And then Kobe goes, is King Kong dying? And Logan goes to me, what does dying mean? And as I'm thinking about what to say, I'm literally saying like it's when you're not alive. And as I'm saying that, Kobe talks over me and he goes, it's when you're dead. Everybody knows that. I like Logan's eye, like Logan's eye just like darted to the left and to the right. Like, and then he just like moved on. Okay. Like trying to process what the hell that meant. My son George came home with a Star Wars book last week.

45:27And so we were reading Star Wars and I'm telling him about it. And he wanted to watch the part where Darth Vader fights Luke Skywalker at the end. So we watched that last night. just the last 20 minutes of the final Star Wars, Return of the Jedi. Yeah, classic. Which is too bad because I'm not a Star Wars guy, but I guess I am. Do you appreciate that scene? Yes. Anything else for you? No, it's been a light week. All right. So in the past, there used to be theater movies and then straight-to-DVD movies, right? I mean, there was TV movies in the past, but... Straight-to-DVD, yep. So now there's theater movies and streaming movies, and especially Netflix.

46:02so I watched Pain Hustlers new Netflix movie with Emily Blunt I got awful reviews right? just it it tried to be like the Wolf of Wall Street but it was Emily Blunt Chris Evans and Andy Garcia so it was like a really good cast it was loosely based on a true story which I use but it just it was so over the top and just there's something about Netflix movies that still just feel like yeah they like if you would see it in the theater you would have been so disappointed but it was on Netflix it was kind of entertaining but it was about the the pharmaceutical sales industry. And it still just kind of boggles my mind.

46:34That's how we get new drugs into the pipeline of like these people who have no medical experience at all, who just happen to be like attractive and young, go into a doctor's office and give them stuff to try to get them to push. It's crazy to me that that's how it works. But so I would say skip that one. On Friday night, I, when I do some writing emails, that's sort of from my computer at the end of the night, I'm winding down. I like to have a movie on in the background. And on Friday night, I put Fool's Rush in. on Matthew Perry and Selma Hayek. And the next day, he passed away. And I got a text message from one of my college friends.

47:09I was a big friend. Obviously, like, he kind of tailed off at the end. No, that was our generation. It really was. But I think the first, like, four seasons of Friends, Chandler Bing is probably, like, one of the greatest sitcom characters of all time. Like, easily the best sarcastic actor I've ever seen. When Joey and Rachel got together, the show fell apart for me. I hated it. Yeah, that was bad. But I forgot. I got a text message from an old college roommate. When we were in college, everyone had the futons, you know? And we were like, why would we get a futon so everyone can come hang out in our room?

47:38We got the matching Joey and Chandler leather chairs. They were leather from Costco and the recliners. And that was in our room in college. I totally forgot. So, yeah. And Fool's Russian, I'm a big 90s rom-com. They just don't make them like that anymore. That was always like an underrated one for me. I always kind of liked that one. Yeah. All right. All right. Animal Spirits at the compound news.com. Thank you for listening. We will see you next time. You always have to pause there because you almost. Still getting used to it. Still getting used to it. We'll see you next time.

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