Prof G Markets: Apple's High Yield Savings Accounts, Shifting to Bonds, and AI vs. IP

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1:25Worst 45 minutes of my life.

1:39Welcome to PropG Markets. Today, we're discussing Apple's high-yield savings account. That's right. That was a good segue. And a roundup of the latest developments in AI. Here with the news is PropG Media Analyst Ed Elson. Ed, how are you? I'm terrible, Scott. I've had the worst two weeks of my life without you. Really? Oh, that's right. I've missed you. So what have you been doing the last two weeks? Did you go on vacation? What did you do? I was still working, working on No Mercy, fact-checking your book, which, by the way, I think is going to be your best book ever, not to give too much away.

2:11That's right. And what is it you like so much about my book, Ed? Can we talk about it? I don't know if we've gotten the go-ahead to talk about what this book is. I don't know if you've heard, but I own this taco stand. We can talk about whatever the fuck I want. It's called the Algebra of Wealth, and it basically takes a lot of the insights that we've developed on this podcast and puts them in writing with extremely actionable advice for young people and honestly up to any age about how to get rich and how to build financial security. and I just was going through and fact-checking stuff and there weren't too many errors, but it was incredibly informative and I'm just, I can't wait for this book to release.

2:55Yeah, well, thanks for saying that. We tried to do something. I have figured it out, but it took me a long time and I thought to myself, how could I have figured it out sooner? And that's what we're trying to do here. But anyways, enough about how awesome we are. Talk to us about the news. Let's start with our weekly review of Market Vitals.

3:17The S &P 500 was stable as earnings rolled in. The dollar was also stable. Bitcoin hit a high for the year above$30 ,000 before plunging again. And the yield on 10-year treasuries tumbled after four straight days of gains. Shifting to the headlines. UK inflation hit 10.1 % year over year in March. That's down slightly from 10.4 % a month earlier, but still a disappointment. UK inflation hasn't dropped below double digits since last summer. China's economy expanded 4.5 % in the first quarter of the year. That's a strong rebound from 2022. Throughout last year, GDP growth was roughly 3 % as the country dealt with its zero COVID policy.

4:02Meanwhile, India is set to surpass China as the world's most populous nation by 2023. Side note, Apple also just opened its first flagship store in India, which has the second largest smartphone market in the world. Tesla reported earnings and it was a miss. First quarter profits declined 24 % year over year. That's largely due to the company's recent price cuts. Its most popular car model is now 30 % cheaper than it was at the beginning of the year. And Tesla shares fell more than 8 % after its report. And finally, Netflix missed expectations on revenue but beat on earnings per share. It also announced it will delay its crackdown on password sharing until the second quarter.

4:42The company anticipates that will boost subscriptions and revenue when viewers are booted off of shared accounts and forced to pay up. Your thoughts, Scott? So the Netflix one is interesting. You would think, why wouldn't they crack down on password sharing just as a general practice? And I guess a certain amount of breakage or leakage or sharing is a good way to get people hooked on content and then move in and say, all right, now it's time to pay. So let them steal it. Give it to, you know, it's almost like a free trial if you let people borrow their passwords. And then they get hooked on a certain program or that type of programming.

5:14And then the additional paying customers will get when they clamp down, you know, pays for the lost revenue. Tesla, it's just super interesting. That's dramatic. Think about that. a car that is 30 % less than it was at the beginning of the year. I mean, can you imagine if you bought the car in November of last year and now it's 30 % cheaper? And then the big one, I think population is going to be a big issue. I'm fascinated by demographics. India being the most populous nation in the world is really fascinating. About 30 years ago, if you had asked a bunch of analysts who was going to be the economic superpower of the 21st century, it would have been split.

5:53Some would have bet on China, some would have bet on India. And China, obviously, incredible manufacturing, huge consumer economy. There are some real efficiencies to an autocracy. You can kind of just get shit done really quickly. But India was a democracy, largest democracy in the world, more English speakers. So we thought being kind of biased towards our system, a lot of people thought India was going to be the economic juggernaut to watch out for. And boy, did we get it wrong. China has blown by India. A lot of it is population, though. When you have a huge middle class and you have innovation and an economy that's growing, you end up with a ton of consumption and economy that just booms.

6:34What they also have is there's something called the dependency index, and that is what percentage of the population is being supported by people who are still working. China, because of its one child policy is going to end up with a large dependence ratio at some point. So I think a lot of smart people who are informed by really intelligent economists, i.e. Apple, have decided they need to start investing in India. And the number that I find really shocking is the UK's inflation is at 10%. It's by far the highest in all of Europe. And you really see it in food prices here. I think food's up 16 or 17%.

7:09And there are just few nations that could have fucked themselves more other than maybe Russia's invasion of Ukraine than what Britain did with Brexit. It just, they basically made all their goods more expensive and at the same time reduced exports, bringing down salaries or bringing down economic growth. So the standard of living for all citizens or the majority of citizens in the United Kingdom has declined. And at the end of the day, the government is supposed to prevent these boneheaded decisions. This was just a disaster. David Cameron, absolutely strategic blunder, thinking that this would be rejected.

7:44It wasn't a past. Few people have done more damage to the UK than Nigel Farage. And I wonder how they get out of this. I wonder if it's a slow burn back or I'm just fascinated by this, what is probably the biggest self-inflicted wound of the last 50 years in the West. And that is, well, it's probably more, I don't know, maybe Iraq. I just want to shift back to Tesla for a second. So something I was seeing on Twitter today, Tesla used to boast that it had basically the highest margins of any other what's called an OEM, which is an original equipment manufacturer, i.e. you're a car company and you're making your own cars.

8:18That used to be their big point of differentiation. That's no longer the case with these price cuts. So just some numbers here. Tesla's gross margins now are 19%. And you compare that to Stellantis, which is 19.6, Volkswagen, 20.1, Mercedes-Benz, was 22.1 and the european average is 20 and then obviously luxury which is a whole different ball game that's 31 so it feels like this is a big hit to tesla do you look at the margins situation and look at the price cuts as a big problem for the business going forward margin is a great litmus test of your differentiation so brand is synonymous with differentiation and then kind of the ultimate limitless tests of differentiation is your margins.

9:05And there's really kind of two ways to build a business or add stakeholder value. One is to pursue a differentiation strategy in LVMH. Dior or a Celine bag is highly differentiated in the eyes of the end consumer. Walmart's products are not differentiated. They sell ginger ale and tide. That's an operations play where they try to be as efficient as possible. Their differentiation is operations and getting you more for less, if you will. So margins are pretty insightful tell around differentiation. And what do you have here in the EV market? You have an incredible decline and implosion and differentiation brought by competition.

9:43And that is a Tesla was wildly differentiated as in singular just two or three years ago. You wanted to buy an EV coupe that could go zero to 60 in three seconds and had a range of 300 plus miles, it was not only differentiated, it was unique. It was the only one. And for a long time, its differentiation was reflected through incredible margins. Now, what's happened? Everyone's piled in. Everyone's trying to grab share. So it's very competitive from a pricing standpoint, and they've been forced to lower their prices, which impacts their margins. Also, they've had some exogenous reasons to lower their prices, and that is tax credits, but this is mostly the field just getting much more crowded and pricing pressure that results in a hit to margins.

10:28They also probably have decided to stay ahead of the curve because they want to get to a certain scale. Manufacturing in the auto business is a business to scale because once you make those multi-billion dollar investments in a factory, you want to punch out a lot of cars. So my guess is they've done the math and said it's better to go for share, it's better to maintain share leadership, get to scale. But this is a massive, there's just no getting around it. This is a huge hit to margins. I think we're going to see the stock come down dramatically. I think the company is going to begin to look like a traditional automobile firm, and that is a lower margin, difficult manufacturing-based business.

11:05And all the analysts who tried to pretend it was a software company to justify these ridiculous multiples on EBITDA are going to realize it's a company that wraps steel around four tires and a motor, and it's a great company. but already its margins have gone from singular to kind of industry standard. Okay, we'll be right back after the break with a look at Apple's high-yield savings accounts. Stay with us.

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13:57We're back with Prof G Markets. Apple has teamed up with Goldman Sachs to launch high-yield savings accounts for Apple Card users. The savings accounts will offer 4.15 % in annual yield, which is more than 10 times the national average. It's also higher than what's offered by many big-name competitors, including American Express, Barclays, and even Goldman Sachs' consumer unit, Marcus. The account has no fees, no minimum deposit, and can be set up from within the wallet app. So Scott, Apple says Goldman is operating these savings accounts. I take that to mean Goldman is doing the banking and Apple is just leveraging its technology.

14:35But Apple also has one of the biggest balance sheets in the world. It's got$129 billion in assets. $21 billion of that is cash. Do you think the goal here for Apple is to eventually become its own independent bank? I don't know. I don't know if they need to. I think they want to focus on what they're good at. But effectively, by becoming a bank, they're now the largest market bank in the world. And what I was thinking about here was we talk a lot about the absence of friction in tech being a danger that a run on the bank can happen in an hour. Emails go out to everyone's phone. Everyone reads their phone in a meeting and it says, withdraw your funds from SVB and they have an app and they can initiate a wire and withdraw all of their funds in five or 10 minutes flat.

15:23There's just an absence of friction. And that has a lot of externalities, a lot of bad things. To me, this brings home the power and the potential of Apple because of a lack of friction. And that is I use Apple Pay and then maybe it pops up when I pay for something saying, do you want to round up this purchase and put it into a savings account, which yields on average five or 10 times what a traditional savings account does. And I say, yes. And then it says another problem. Would you like us to do this for every purchase? And do you want us to round up purchases under$10 to the nearest dollar, purchases over$100 up to the nearest$10.

15:58And then it says, we estimate that you will do$700 or$800 a year. And then in 10 years, if you do this for 10 years at 4.2%, you're going to have$25 ,000. They can so easily get money and assets and start providing financial services. And the analog or the kind of digital old school analog was you walk by a bank and it says three months cd 3.4 percent and you're like wow that's a great rate i'll come back tomorrow what is the likelihood you'll find something better to do than going to the bank during business hours wait in line find out about this fill out paperwork transfer funds fill out more paperwork well guess what all you need is an iPhone, and you can make those sorts of transfers.

16:46I want to go back to that 4.15 % rate. So as Apple said, that's 10 times higher than the national average, which is 0.37%. That's the rate, that's the annual percentage yield that you get on an average US savings account. And to me, that is crazy because in the past year, Jerome Powell has raised the Fed funds rate, that's the risk-free rate from 0.2 % to 4.6%. That's in 12 months. And meanwhile, the average interest rate on a savings account has barely moved. So I did some research on this. And every time that interest rates rise, the rise in the deposit rate barely moves with it. And then as soon as it declines, it sinks like a rock.

17:30And it turns out that there's a term for this idea of the percentage of federal rate rises that pass through to savings account interest rate rises. And it's called deposit beta. And right now, deposit betas are at historic lows. It's around 20%. In other words, every percentage point that Jerome Powell raises rates, you'll only have a 0.2 % rise in savings account interest rates. So my question to you, Scott, is this seems unfair for depositors, for just regular consumers with savings accounts. Why is that happening? So George Carlin, I remember watching one of his stand-ups, of course, on TikTok, and he said something really that really struck me as insightful.

18:14He said that just because companies and institutions aren't directly coordinating doesn't mean there isn't a conspiracy. And I think that banks wink and nod at each other and never put it down in email, but when interest rates go up, it's very sticky and very slow to pass on that incremental increase in interest rates to their depositors. And yet when interest rates come down, it's immediate. Sorry, we're cutting the interest rate we're giving you. The same is true of gas prices. Oil prices skyrocket. Boom. You see it, the price of the pump immediately in a step change increase. Oil prices come down and they gradually come down.

18:54They lag. And there's an asymmetry of information in that. As most consumers are really busy, especially retail banking clients, and they aren't following the Fed. And they're used to getting 0.4 % on their money. They're busy. Maybe they don't really understand basic finance. One of the big deltas in America, or the big deltas in people's knowledge base, is there's a lot of incredibly well-educated people that understand how to do derivatives, understand how to do calculus, but don't understand the interest rates on their deposits and what it means and that they need to track this stuff. Because the difference, 4 % doesn't sound like a lot of money.

19:28But 4 % versus 1 % on$100 ,000 over four or five years, that pays rent for your daughter at college. And it compounds. So you want to be very sensitive and constantly even putting out alerts looking at interest rate increases. People don't think about the interest rates they pay on their credit card because it doesn't seem like a lot when it's only – if it's 18 % a year, well, that's only 1.5 % a month. Well, guess what? That year flies by and instead of paying 400 bucks, you're paying 472 and you keep rolling it. And before you know it, you owe double what you used to owe just four years later.

20:09So there is a conspiracy to make it really slow on movements and things you have to pay consumers or prices you pass through when it's a benefit to the corporation. And, you know, there's a direct correlation when it moves away from the consumer. And what it all comes down to is consumers need to be thoughtful and on their toes and really need to understand this stuff. What Apple's doing here is clear. They have decided that in their next earnings call, they want to say, we launched this and we have$7 jillion in deposits almost overnight. The cocktail, the nitro and the glycerin of that frictionless ability to make deposits vis-a-vis the interface with the billion wealthiest people in the world and the fact that they can afford to offer an above market interest rate, they are going to grab deposits like crazy.

20:59When they announce that in just a few weeks or a few months, they are now one of the biggest banks by deposits. Oh, my gosh, the greed glands are going to get going for analysts and go, oh, my God, Apple could become one of the biggest financial services companies in the world just overnight. Yeah, I think another second-order effect you'll see is that as everyone learns about this APY rate that they're offering, the competition for higher yields is just going to increase, which is ultimately going to have an inflationary effect on all savings account rates. I mean, you just won't be allowed to be offering a 0.37 % rate on a savings account because everyone knows, oh, well, this company, Apple, they offer 4.15%.

21:41So it almost feels like what Apple has done will be more consequential to consumer savings rates than anything that Jerome Powell has done in the past 12 months. And it's also interesting that we're even talking about this because it feels like for the past decade or so, while we've been in a zero interest rate environment, no one cared about APYs. Like, who gives a shit about interest rates on savings accounts? Because you weren't really getting any. Yeah, the difference between 0.2 and 0.22 didn't really mean much. Exactly. And now everyone's waking up to the fact that, oh, we can get money for our money.

22:19And we're seeing all this interest in bonds and in money market funds and in treasuries. It's starting to feel like the global investment strategy is kind of changing. So my question to you is, has your personal investment strategy changed in the same way that the world seems to be? It has. But first, it's important, again, just to reinforce how important it is that people are good at money. And people say, well, I don't think about money. Well, you better think about money because if you want to be good at it, you want to be economically secure just the way Roger Federer thinks about tennis a lot.

22:51You need to be thinking about money. You need to understand it. You need to understand some of the basics. And we talked about the inflation rate of 10 plus percent here in the UK. If you're one of these people not monitoring your bank account and if you're not monitoring, I find your money, it means you're fucking up. It means it's the situation is worse than you think. So say they're one of those people that's getting point three percent on their savings and inflation is 10 percent. That means effectively, if you're making 80 ,000 pounds, congratulations this year, you got a 10 % pay cut. 10 % inflation, 0.3 % on your savings.

23:24You are now effectively have purchasing power that has declined 9.7%. That's like your boss calling you in and saying, you no longer make 80 ,000 pounds a year, you make 72 ,000. So you need to be all over this stuff and always looking for yield and always looking for the lowest interest rate possible. Even if it means taking money off a credit card and putting it onto another credit card because it's offering a lower APY. Even if it means taking a loan against your house to pay off high interest credit cards. You always want to be figuring out ways to reduce the interest you are paying on anything and increase the interest rate that you are getting.

24:02As it relates to my own investment strategy, it has impacted it. And that is, for the first time, I'm actually thinking about investing in credit vehicles or, you know, better known as bonds. I have never, I think I owned one bond once. I think I owned a bond in Gannett, the newspaper company, because I invested with Apollo. It was a good yield. I like newspapers. It felt like a pretty safe credit. I only owned it for about a year. But I'm thinking about buying bonds again. I've always owned stocks. and the primary benefit of bonds is one, they produce cashflow, they have yield usually, or a coupon payment or interest payment paid to the owner of the bond.